Even if we are successful in developing a product, our customers' failure to launch one of our products successfully, or delays in manufacturing developed products, could adversely affect our operating results. In addition, the FDA or similar regulatory agency could impose higher standards and additional requirements, such as requiring more supporting data and clinical data than previously required, in order to gain regulatory clearance to launch new formulations into the market, which could negatively impact our future net sales.
We operate in highly regulated industries, and any inability to timely meet current or future regulatory requirements could have a material adverse effect on our business, financial position, and operating results.
We must obtain approval from the appropriate regulatory agencies in order to manufacture and sell our products in the regions in which we operate. Obtaining this approval can be time consuming and costly. There can be no assurance that, in the event we submit an application for a marketing authorization to any global regulatory agency, we will obtain the approval to market a product and/or that we will obtain it on a timely basis. Laws unique to the U.S. regulatory framework encourage generic competition by providing eligibility for first generic marketing exclusivity if certain conditions are met. If we are granted generic exclusivity, the exclusivity may be shared with other generic companies, including authorized generics; or it is possible that we may forfeit 180-day exclusivity if we do not obtain regulatory approval or begin marketing the product within the statutory requirements. Finally, if we are not the first to file our ANDA, the FDA may grant 180-day exclusivity to another company, thereby effectively delaying the launch of our product and/or possibly reducing our market share.
Global regulatory agencies regularly inspect our manufacturing facilities and the facilities of our third-party suppliers. The failure of one of our facilities, or a facility of one of our third-party suppliers, to comply with applicable laws and regulations may lead to a breach of representations made to our customers, or to regulatory or government action against us related to the products made in that facility. Such action could include suspension of or delay in regulatory approvals. If the compliance violations are severe, agencies of the government may initiate product seizure, injunction, recall, suspension of production or distribution of our products, loss of certain licenses or other governmental penalties, or civil or criminal prosecution, thereby impacting the reputation of all of our products.
In the U.S., the DSCSA requires development of an electronic pedigree to track and trace each prescription drug at the salable unit level through the distribution system, which will be effectiveis being implemented incrementally over a 10-year period beginning on January 1, 2015, for manufacturers, wholesale distributors, and re-packagers, and on July 1, 2015 for dispensers. Similarly,Compliance with the U.S. electronic pedigree requirements has and will continue to increase our operational expenses and impose significant administrative burdens.
prescription medicines sector. The act was adopted February 9, 2016.All marketing authorization holders in the EU member states (with the exception of Belgium, Italy and Greece), and EEA members Norway, Iceland, Liechtenstein and Switzerland must be in compliance within three years, orwere required to introduce the necessary changes by February 9, 2019.2019 (or risk forfeiting their product licenses). However, manufacturers based out of Greece, Belgium and Italy and Greece have an extended timeline until February 9, 2025 to comply. Marketing Authorization holders will have three years from the publication date to implement the necessary changes or risk forfeitingserialization guidelines as they already feature similar requirements on their product licenses.current drug packages. Compliance with the new U.S. and EU electronic pedigree requirements mayhas and will continue to increase our operational expenses and impose significant administrative burdens.
Global regulatory agencies highly scrutinize any product application submitted to switch a product from physician prescribed Rx to unsupervised OTC use by the general public. The expansion of Rx-to-OTC
switches is critical to our future growth. Reluctance of regulatory agencies to approve Rx-to-OTC switches in new product categories could impact that growth.
Our infant formula products may be subject to barriers or sanctions imposed by countries or international organizations limiting international trade and dictating the specific content of infant formula products. Governments could enhance regulations on the industry aimed at ensuring the safety and quality of dairy products, including but not limited to, compulsory batch-by-batch inspection and testing for additional safety and quality issues. Such inspections and testing may increase our operating costs related to infant formula products.
If we are unable to successfully obtain the necessary quota for controlled substances and List I chemicals, we risk having delayed product launches or failing to meet commercial supply obligations. If we are unable to comply with regulatory requirements for controlled substances and List I chemicals, the DEA, or similar regulatory agency, may take regulatory actions, resulting in temporary or permanent interruption of distribution of our products, withdrawal of our products from the market, or other penalties.
In order to commercially distribute our medical device products in the EU, they need to conform with the requirements of applicable EU directives. The method of assessing conformity varies depending on the class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a Notified Body,notified body, an organization accredited by a member state, which includes an audit of the manufacturer’s quality system and, for some products, specific product testing. If our products fail to meet the applicable EU directives, then we may not meet our projected growth targets and/or incur fines and penalties.
Increasing healthcare expenditures have received considerable public attention in many of the countries in which we operate. In the U.S., government programs such as Medicare and Medicaid, as well as private insurers, have been focused on cost containment. In some markets in the EU and outside the U.S., the government provides healthcare at low direct cost to consumers and regulates pharmaceutical prices or patient reimbursement levels to control costs for the government-sponsored healthcare system. Both private and governmental entities are seeking ways to reduce or contain healthcare costs. For example, the proposed Affordable Drug Manufacturing Act would create a new office within the U.S. Department of Health and Human Services tasked with manufacturing certain generic drugs to be offered directly to consumers. It is unclear if this proposed legislation will be enacted, but these or similar legislative or regulatory efforts could place further pricing pressure on our products and could negatively impact our results of operations.
If we fail to comply with the reporting and payment obligations under the Medicaid rebate program or other governmental purchasing and rebate programs, we could be subject to fines or penalties, which could have an adverse effect on our financial condition and results of operations.
By their nature, these programs require us to provide discounts and rebates and therefore reduce our net product revenues.revenue. Further, because the amounts of these discounts are based on our commercial sales practices and can be adversely affected by both significant discounts and price increases, it is important that we maintain pricing practices that appropriately take into account these government pricing programs.
We are required to report pricing data to CMS, including AMP, on a monthly and quarterly basis and BP and ASP on a quarterly basis. We also are required to report quarterly and annual Non-FAMPs to the VA. If we fail to submit required information on a timely basis, make misrepresentations, or knowingly submit false information to the government as to AMP, ASP, or BP, we may be liable for substantial civil monetary penalties or subject to other enforcement actions, such as under the False Claims Act, and CMS may terminate our Medicaid drug rebate agreement. In that event, U.S. federal payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs.
Under the 340B program, if we fail to provide required discounts to covered entities, including in connection with the revision of AMP or BP data, we may be subject to refund claims or civil moneymonetary penalties under that program.
If we inadvertently overcharge the government in connection with our FSS contract or TriCare Agreement, whether due to a misstated FCP or otherwise, we would be required to refund the difference. Failure to make necessary disclosures and/or to identify contract overcharges can result in False Claims Act allegations or potential violations of other laws and regulations. Unexpected refunds to the government, and responses to a government investigation or enforcement action, are expensive and time-consuming, and
could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
Our reporting and payment obligations under the Medicaid rebate program and other governmental purchasing and rebate programs are complex and may involve subjective decisions. Our calculations and methodologies are subject to review by the governmental agencies, and it is possible that these reviews could result in challenges to our submissions. If we do not comply with those reporting and payment obligations, we could be subject to civil and/or criminal sanctions, including fines, penalties, and possible exclusion from U.S. federal healthcare programs.
Lack of availability, or significant increases in the cost, of raw materials used in manufacturing our products could adversely impact our profit margins and operating results.
We maintain several single-source supplier relationships, either because alternative sources are not available or because the relationship is advantageous due to regulatory, performance, quality, support, or price considerations. Unavailability or delivery delays of single-source components or products could adversely affect our ability to ship the related product in a timely manner. The effect of unavailability or delivery delays would be more severe if associated with our higher-volume or more profitable products. Even where alternative sources of supply are available, qualifying the alternate suppliers and establishing reliable supplies could cost more or result in delays and a loss of net sales. Additionally, global regulatory requirements for obtaining product approvals could substantially lengthen the approval of an alternate material source. As a result, the loss of a single-source supplier could have a material adverse effect on our results of operations.
The rapid increase in cost of many raw materials from inflationary forces, such as increased energy costs, and our ability or inability to pass on these increases to our customers could have a negative material impact on our financial results.
Our infant formula products require certain key raw ingredients that are derived from raw milk, such as skim milk powder, whey protein powder, and lactose. Our supply of milk-based ingredients may be limited by the ability of individual dairy farmers and cooperatives to provide raw milk in the amount and quality we deem necessary. Raw milk production is influenced by factors beyond our control including seasonal and environmental factors, governmental agricultural and environmental policy, and global demand. We cannot guarantee that there will be sufficient supplies of these key ingredients necessary to produce infant formula.
Our products, and the raw materials used to make the products mentioned above, generally have limited shelf lives. Our inventory levels are based, in part, on expectations regarding future sales. We may experience build-ups in inventory if sales slow. Any significant shortfall in sales may result in higher inventory levels of raw materials and finished products, thereby increasing the risk of inventory spoilage and corresponding inventory write-downs and write-offs. Cargo thefts and/or diversions and economically or maliciously motivated product tampering on store shelves may occur, causing unexpected shortages and harm to our reputation, which may have a material impact on our operations.
We rely on third parties to source many of our raw materials, as well as to manufacture certain dosage forms such as sterile, injectable products that we distribute. We maintain a strict program of verification and product testing throughout the ingredient sourcing and manufacturing process to identify potential counterfeit ingredients, adulterants, and toxic substances. Nevertheless, discovery of previously unknown problems with the raw materials or product manufacturing processes, or new data suggesting an unacceptable safety risk associated therewith, could result in a voluntary or mandatory withdrawal of the contaminated product from the marketplace, either temporarily or permanently. Any future recall or removal would result in additional costs and lost revenue, harm our reputation, and may give rise to product liability litigation.
Changes in regulation could impact the supply of the API and certain other raw materials used in our products. For example, the EU recently promulgated new standards requiring all API imported into the EU be certified as complying with GMP established by the EU. The regulations placed the certification
requirement on the regulatory bodies of the exporting countries, which led to an API supply shortage in Europe as certain governments were not willing or able to comply with the regulation in a timely fashion, or at all. In addition, due to the recent outbreak of the coronavirus, we could experience supply disruptions related to materials sourced directly and indirectly from China or elsewhere. A shortage in API or other raw ingredients could cause us to have to cease manufacture of certain products, or to incur costs and delays to qualify other suppliers to substitute for those API manufacturers who are unable to export. This could have a material adverse effect on our business, results of operations, financial condition, and cash flow.
A disruption at any of our main manufacturing facilities could materially and adversely affect our business, financial position, and results of operations.
Additionally, regulatory authorities routinely inspect all of our manufacturing facilities for cGMP compliance. While our manufacturing sites are cGMP compliant, if a regulatory authority were to identify serious adverse findings not corrected upon follow up inspections, we may be required to issue product recalls, shutdown manufacturing facilities, and take other remedial actions. If any manufacturing facility were forced to cease or limit production, our business could be adversely affected.
We are increasingly dependent upon information technology systems to operate our business. Our systems, information and operations as well as our independent vendor relationships (where they support information technology and manufacturing infrastructure), are highly complex.complex and interrelated with our external business partners. These systems may contain confidential information (including personal data, trade secrets or other intellectual property, or proprietary business information). The sizenature of digital systems, both internally and complexity of these systemsexternally, makes them potentially vulnerable to disruption or damage from human error and/or security breaches, hacking,which include, but are not limited to, ransomware, data theft, denial of service attacks, human error, sabotage, industrial espionage, and computer viruses. Such events may be difficult to detect, and once detected, their impact may be difficult to assess.assess and address.
Additionally, if we are unable to maintain adequately high levels of customer service over time, customers may choose to assess penalties, obtain alternate sources for products, and/or end their relationships with us.
We are dependent on the services of certain key members of management. Our inability to successfully manage transition, or the failure to attract and retain other key members of management, may have a material adverse impact on our results of operations.
We are dependent on the services of certain key employees, and our future success will depend in large part upon our ability to attract and retain highly skilled employees. Key functions for us include executive managers, operational managers, R&D scientists, information technology specialists, financial and legal specialists, regulatory professionals, quality compliance specialists, and sales/marketing personnel. If we are unable to attract or retain key qualified employees, our future operating results may be adversely impacted.
Unfavorable publicity or consumer perception of the safety, quality, and efficacy of our products could have a material adverse impact on our business.
We are dependent upon consumers' perception of the safety, quality, and efficacy of our products, and may be affected by changing consumer preferences. Negative consumer perception may arise from media reports, product liability claims, regulatory investigations, or recalls, regardless of whether they involve us or our products. The mere publication of information asserting defects in products or ingredients, or concerns about our products or the materials used in our products, could discourage consumers from buying our products, regardless of whether such information is scientifically supported.
Our products involve risks such as product contamination, spoilage, mislabeling, and tampering that could require us to recall one or more of our products. Serious product quality concerns could also result in governmental actions against us that, among other things, could result in the suspension of production or distribution of our products, product seizures, loss of certain licenses, delays in the issuance of governmental approvals for new products, or other governmental penalties, all of which could be detrimental to our reputation and reduce demand for our products.
We cannot guarantee that counterfeiting, imitation or other tampering with our products will not occur or that we will be able to detect and resolve it. Any counterfeiting or contamination of any products could negatively impact our reputation and sales, particularly if counterfeit or imitation products cause death or injury to consumers.
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• | Our CSCI segment's financial success is dependent on the success of its brands, and the success of these brands can suffer if marketing plans or product initiatives do not have the desired impact on a brand’s image or its ability to attract consumers, and the performance of the segment may be negatively impacted if spending on such plans and initiatives does not generate the returns we anticipate. In addition, given the association of individual products within the commercial network of our CSCI segment, an issue with one of our products could negatively affect the reputation of other products, thereby potentially hurting our financial results. |
Powdered infant formula products are not sterile. All of our infant formula products must be prepared and maintained according to label instruction to retain their flavor and nutritional value and avoid contamination or deterioration. Depending on the product, a risk of contamination or deterioration may exist at each stage of the production cycle, including the purchase and delivery of raw materials, the processing and packaging of food products, and the use and handling by consumers, hospital personnel, and healthcare professionals. In the event thatIf certain of our infant formula products are found or alleged to have suffered contamination or deterioration, whether or not under our control, our reputation and our infant formula product category sales could be materially adversely affected.
Increasing use of social media could give rise to liability, breaches of data security, or reputation damage.
The Company and our employees increasingly utilize social media as a means of internal and external communication.
To the extent that we seek to use social media tools as a means to communicate about our products and/or business, there are uncertainties as to the rules that apply to such communications, or as to the interpretations that authorities will apply to the rules that exist. As a result, despite our efforts to monitor evolving social media communication guidelines and comply with applicable rules, there is risk that our use of social media for such purposes may cause us to be found in violation of them. A violation of such guidelines may damage our reputation as well as cause potential lawsuits and adversely affect our operating activities.
Our employees may knowingly or inadvertently make use of social media tools in ways that may not be aligned with our social media strategy, may give rise to liability, or could lead to the loss of trade secrets or other intellectual property, or public exposure of personal information (including sensitive personal information) of our employees, clinical trial patients, customers, and others.
Negative posts or comments about us, store brands or generic pharmaceuticals, or our products in social media could seriously damage our reputation and could adversely affect the price of our securities.business. In addition, negative posts or comments about our products could result in increased pharmacovigilance reporting requirements, which may give rise to liability if we fail to fully comply with such requirements.
Perrigo Company plc- Item 1A
Risk Factors
Our quarterly results are impacted by a number ofseveral factors, some of which are beyond the control of our management, that may result in significant quarter-to-quarter fluctuations in operating results.
Some of the factors that may impact our quarterly results include, but are not limited to, the severity, length and timing of the cough/cold/flu and allergy seasons, the flea and tick season, the timing of new product approvals and introductions by us and our competitors, price competition, changes in the regulatory environment, changes in accounting pronouncements, changes in the levels of inventories maintained by our customers, and the timing of retailer promotional programs. These and other factors may result in significant variations in our operating results from quarter to quarter.
We may not be able to sustain or improve operating results in our business segments.
We have experienced a reduction in pricing expectations during 2017 in comparisonSeveral factors may impact our ability to historical patterns in our U.S. businesses, in particular in our RX segment, due to competitive pressures in the sector. The reduced pricing is attributable to a variety of factors including increased focus from customers to capture supply chain productivity savings, competition in specific product categories, the loss of exclusivity on certain products, the recent increase in the speed and number of approvals from the FDA, and consolidation of certain customers in the RX segment. We expect this pricing environment to continue to impact the Company for the foreseeable future.
The CHCI segment has been positively impacted by market dynamics in countries such as the Nordics, Italy, and Portugal offset by softness in certain brand categories in France and Germany, as well as by unfavorable foreign currency impacts primarily in the U.K. related to Brexit. In addition, the segment had been impacted in Belgium due to cancellations of unprofitable distribution agreements. The CHCI segment has restructured its approach to addressing these markets including: (1) the implementation of a brand prioritization strategy to address these market dynamics, with an objective to balance the cost of advertising and promotional investments with expected contributions from category sales, and (2) restructured its sales force in each of these markets to more effectively serve customers. The combination of these actions is expected tosustain or improve the segment's focus on higher value OTC products, reduce selling costsoperating results of our business segments. These factors include but are not limited to, the continued impact of pricing pressure, the success of new product launches, the impact of manufacturing disruptions or delays, and improve operating margins in the segment.
We continue to experience a reduction in pricing expectations within our CHCA segment, primarily in the cough/cold, animal health, and analgesics categories due to various factors, including focus from customers to capture supply chain productivity savings and competition in specific product categories. We expect this pricing environment to continue to impact our CHCA segment for the foreseeable future.
success of strategic improvement initiatives. There can be no assurance that we will not continue to experience challenges related to our segments, and these challenges could have a material impact on our business, cash flows, and results of operations or result in impairment charges, and the market value of our ordinary shares and/or debt securitiesmay decline.
We may not realize the benefits of business acquisitions and divestitures we enter into, which could have a material adverse effect on our operating results.
In the normal course of business, we engage in discussions relating to possible acquisitions and divestitures. These transactions are accompanied by a number ofseveral risks. Many of these risks are beyond our control, and any one of them could result in increased cost, decreased net sales and diversion of management’s time and energy, any or all of which could materially impact our business, financial condition, and results of operations.
Acquisitions
One of our strategies is inorganic growth through the acquisition of products and companies that we expect will benefit the Company. This strategy comes with a number ofseveral financial, managerial, and operational risks. We may not realize the benefits of an acquisition because of integration and other challenges, including, but not limited to the following:
Difficulty involved with managing the expanded operations of the respective parties, as well as identifying the extent of all weaknesses, risks, and contingent and other liabilities;
Perrigo Company plc- Item 1A
Risk Factors
Uncertainties involved in assessing the value, strengths, and potential profitability of the respective parties, as well as identifying the extent of all weaknesses, risks, and contingent and other liabilities of acquisition targets;
Unanticipated changes in the business, industry, market or general economic conditions different from the assumptions underlying our rationale for pursuing the transaction;
Difficulties due to a lack of, or limited experience in, any new product or geographic markets we enter;
Inability to achieve identified operating and financial synergies, or return on investment, from an acquisition in the amounts or on the time frame anticipated;
Substantial demands on our management, operational resources, technology, and financial and internal control systems, which could lead to dissatisfaction and potential loss of key customers, management, or employees;
Integration activities that may detract attention from our day-to-day business, and substantial costs associated with the transaction process or other material adverse effects as a result of these integration efforts; and
Difficulties, restrictions or increased costs associated with raising future capital in connection with an acquisition may impact our liquidity, credit ratings and financial position, thereby making it more difficult, restrictive or expensive to raise future capital. In addition, the issuance of equity to pay a portion of the purchase price for an acquisition would dilute our existing shareholders.
Perrigo Company plc- Item 1A
Risk Factors
Divestitures
We may evaluate potential divestiture opportunities with respect to portions of our business (including specific assets or categories of assets) from time to time, and may proceed with a divestiture opportunity if and when we believe it is consistent with our business strategy and initiatives. Any future divestitures could expose us to significant risk, including without limitation:
Our ability to effectively transfer liabilities, contracts, facilities and personnel to any purchaser;
Fees for legal and transaction-related services;
Diversion of management resources; and
Loss of key personnel and reduction in revenue.
If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operations.
The plan to separate our RX business is contingent upon several conditions, is subject to change in form or timing, may not achieve the intended benefits, and could adversely affect our business and financial condition.
On August 9, 2018, we announced a plan to separate our RX business, which, when completed, will enable us to focus on expanding our consumer-focused businesses. In 2019, we continued preparations related to our planned separation, which may include a possible sale, spin-off, merger or other form of separation. While we remain committed to transforming to a consumer-focused business, we have not committed to a specific date or form for the separation.
The separation of the RX business could impact our ability to retain key employees, comply with existing debt arrangements, maintain our credit ratings and raise future capital. Further, even if the separation is completed, we may not achieve the anticipated operational, financial, strategic or other benefits of the separation. After the separation, the combined value and financial performance of the Company and RX business may not equal the value and financial performance of the Company had the separation not occurred.
In connection with the proposed separation, we have incurred significant preparation costs and will continue to incur costs that, when completed, will be in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending on the final timing and structure of the transaction. In addition, completion of the separation will require a significant amount of management time and effort, which may disrupt our business or otherwise divert management’s attention from other aspects of our business, including our other strategic initiatives, possible organic or inorganic growth opportunities, and customer and vendor relationships. Any of the foregoing risks could adversely affect our business, results of operations, liquidity, and financial condition.
Our business could be negatively affected by the performance of our collaboration partners and suppliers.
We have entered into strategic alliances with partners and suppliers to develop, manufacture, market and/or distribute certain products, or components of our products in various markets. We commit substantial effort, funds and other resources to these various collaborations. There is a risk that our investments in these collaborative arrangements will not generate financial returns. While we believe our relationships with our partners and suppliers generally are successful, disputes, conflicting priorities or regulatory or legal intervention could be a source of delay or uncertainty as to the expected benefit of the collaboration (refer to Item 8. Note 1718 for additional detail on our collaborative agreements and other contractual arrangements)). A failure or inability of our partners or suppliers to fulfill their collaboration obligations, or the occurrence of any of the risks above, could have an adverse effect on our business, financial condition, and results of operations. We have acquired significant assets that could become impaired or subject us to losses and may result in an adverse impact on our results of operations.
We have recorded significant goodwill and intangible assets and goodwill on our balance sheet as a result of previous acquisitions, which could become impaired and lead to material charges in the future.
Perrigo Company plc- Item 1A
AsRisk Factors
During the year ended December 31, 2019, we recorded a goodwill impairment charge of $109.2 million in our RX segment, definite-lived impairment charges of $69.5 million in our RX and CSCI segments, and $5.8 million of impairment charges related to certain in-process research and development ("IPR&D") assets in our CSCA, CSCI, and RX segments.
During the year ended December 31, 2018, we recorded goodwill, definite-lived and indefinite-lived intangible asset impairment charges of $136.7 million, $49.6 million and $27.7 million primarily in our CSCA segment, respectively, and $8.7 million of impairment charge related to certain IPR&D assets in our CSCA segment.
During the year ended December 31, 2017, we recorded definite-lived intangible asset impairment charges of $19.7 million related to developed product technology/formulation and product rights, and distribution and license
Perrigo Company plc- Item 1A
Risk Factors
agreements primarily in our RX segment and $12.7 million of impairment charge related to certain IPR&D assets primarily in our RX segment.
As of the year ended December 31, 2016, we recorded the following impairments:
Goodwill impairment charges of $1.1 billion related to our Specialty Sciences, Branded Consumer Healthcare-Rest of World ("BCH-ROW"), BCH-Belgium, and Animal Health reporting units.
Indefinite-lived and definite-lived intangible asset impairment charges of $1.5 billion related to: Trademarks, trade names and brands, developed product technology/formulation and product rights, distribution and license agreements, and supply agreements.
We perform an impairment analysis on intangible assets subject to amortization when there is an indication that the carrying amount of any individual asset may not be recoverable. Any significant change in market conditions, estimates or judgments used to determine expected future cash flows that indicates a reduction in carrying value may give rise to impairment in the period that the change becomes known. Goodwill, indefinite-lived intangible asset, and definite-lived intangible asset impairments are recorded in Impairment charges on the Consolidated Statement of Operations. As of December 31, 2017,2019, the net book value of our goodwill and intangible assets and goodwill were $3.4$4.1 billion and $4.2$3.0 billion, respectively. Seerespectively (refer toItem 8. Note 34for more information on the above impairment charges.).
There can be no assurance that our strategic initiatives will achieve their intended effects.
We are in the process of implementing certain initiatives designed to increase operational efficiency and improve our return on invested capital by globalizing our supply chain through global shared service arrangements, streamlining our organizational structure, making key executive employee changes, performing a strategic portfolio review, and disposing of certain assets. Furthermore, we are transitioning into a consumer-focused, self-care company. We believe these initiatives will enhance our net sales, operating margins, and earnings; however, there can be no assurance that these initiatives will produce the anticipated benefits. Any delay or failure to achieve the anticipated benefits could have a material adverse effect on our projected results.
WeWhile we have remediated previously identified material weaknesses in our internal controlscontrol over financial reporting; failurereporting related to remediateour income tax process, we may identify other material weaknesses in the material weakness could negatively impact our business andfuture.
We are required to evaluate the priceeffectiveness of our ordinary shares.
In connectiondisclosure controls on a periodic basis and publicly disclose the results of these evaluations and related matters in accordance with our reviewthe requirements of certain material misstatements related to the characterizationSection 404 of the Tysabri® royalty stream, income taxes andSarbanes-Oxley Act of 2002. During the evaluation of long-lived assets in our animal health reporting unit for impairment testing, in each case contained in certain of our historical financial statements and identified as part of ouryears ended December 31, 2016 year end,and December 31, 2017, we concluded that there wereidentified certain material weaknesses in our internal control over financial reporting that contributedrelated to those misstatements. The material weaknesses over the matters associated with our income tax process, which have been remediated.
While we have remediated those previously identified material weaknesses, there can be no assurances that was identified during our fiscal year ended December 31, 2016 was not remediated duringcontrols will remain adequate. Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, including retention of key employees, could result in additional material weaknesses or material misstatements in our fiscal year ended December 31, 2017, and we determinedConsolidated Financial Statements. Any new misstatement could cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price. We cannot assure you that we didwill not design or maintain effective controls over our income tax accounting process. As a result of the materialdiscover additional weaknesses we concluded that we did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016, April 1, 2017, July 1, 2017, September 30, 2017 or December 31, 2017 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The failure to maintain effective control over financial reporting in turn resulted in material deficiencies in our disclosure controls and procedures.
We continue to identify and implement, actions to improve the effectiveness of our internal control over financial reporting and disclosure controls and procedures, but there can be no assurance that such remediation efforts will be successful. We have also incurred and may continue to incur substantial accounting, legal, consulting, and other costs in connection with remediating the material weaknesses. Failure to remediate the material weaknesses could have a negative impact on our business and the market for our ordinary shares. For more information on our material weaknesses and the status of our remediation efforts, see Item 9A - Controls and Procedures, which includes Management's Report on Internal Control over Financial Reporting.reporting.
Perrigo Company plc- Item 1A
Risk Factors
Global Risks
Our business, financial condition, and results of operations are subject to risks arising from the international scope of our operations.
We manufacture, source raw materials, and sell our products in a number of countries. The percentage of our business outside the U.S. has been increasing. We are subject to risks associated with international manufacturing and sales, including:
Unexpected changes in regulatory requirements;
Problems related to markets with different cultural biases or political systems;
Possible difficulties in enforcing agreements;
Longer payment cycles and shipping lead-times;
Difficulties obtaining export or import licenses;
Changes to U.S. and foreign trade policies, including the enactment of tariffs on goods imported into the U.S., including but not limited to, goods imported from Mexico;China; and
Imposition of withholding or other taxes.
Additionally, we are subject to periodic reviews and audits by governmental authorities responsible for administering import/import and export regulations. To the extent that we are unable to successfully defend against an audit or review, we may be required to pay assessments, penalties, and increased duties.
Certain of our facilities operate in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board, which allows us certain tax advantages on products and raw materials shipped through these facilities. If the Foreign Trade Zone Board were to revoke the sub-zone designation or limit our use, we could be subject to increased duties.
Although we believe that we conduct our business in compliance with applicable anti-corruption, anti-bribery and economic sanctions or other anti-corruption laws, if we are found to not be in compliance with such laws or other anti-corruption laws, we could be subject to governmental investigations, legal or regulatory proceedings, substantial fines, and/or other legal or equitable penalties. This risk increases in locations outside of the U.S., particularly in locations that have not previously had to comply with the FCPA, U.K. Bribery Act 2010, Irish Criminal Justice (Corruption Offenses) Act 2018, and similar laws.
We operate in jurisdictions that could be affected by economic and political instability, which could have a material adverse effect on our business.
Our operations and supply partners could be affected by economic or political instability, embargoes, military hostilities, unstable governments and legal systems, and inter-governmental disputes. We have significant operations in Israel, which has experienced varying degrees of hostility in recent years. Doing business in Israel and certain other regions involves the following risks:
Certain countries and international organizations have refused to do business with companies with Israeli operations. We are also precluded from marketing our products to certain countries due to U.S. and Israeli regulatory restrictions. International economic sanctions and boycotts of our products could negatively impact our sales and ability to export our products.
Our facilities in Israel are within a conflict zone. If terrorist acts or military actions were to result in substantial damage to our facilities, our business activities would be disrupted since, with respect to most products, we would need to obtain prior regulatory agency approval for a change in manufacturing site. In addition, our insurance may not adequately compensate us for losses that may occur, and any losses or damages incurred by us could have a material adverse effect on our business.
Perrigo Company plc- Item 1A
Risk Factors
The U.S. Department of State and other governments have at times issued advisories regarding travel to certain countries in which we do business. As a result, regulatory agencies have, at various times, curtailed or prohibited their inspectors from traveling to inspect facilities. If these inspectors are unable to inspect our facilities, the regulatory agencies could withhold approval for new products intended to be produced at those facilities.
Our international operations may be subject to interruption due to travel restrictions, war, terrorist acts, and other armed conflicts. Also, further threats of armed hostilities in certain countries could limit or disrupt markets and our operations, including disruptions resulting from the cancellation of contracts or the loss of assets. These events could have a material adverse effect on our international business operations.
The UK held a referendum onOn June 23, 2016, on its membershipthe UK electorate voted in the EU. A majority of UK voters voteda referendum to exitvoluntarily depart from the EU, (“Brexit”)known as "Brexit". TheFollowing the formation of a majority Conservative government in December 2019, the UK is scheduled to leaveapproved the withdrawal agreement and left the EU on March 29, 2019, and negotiations are taking place to determine the futureJanuary 31, 2020. The terms of the UK’s relationshipUK's final withdrawal remain subject to ongoing negotiation until December 31, 2020, during which current EU regulations will continue to apply in the UK. The UK Parliament banned extensions to the transition period, so the UK must finalize new trading agreements with the EU by December 31, 2020. Trade negotiations are expected to begin in early March 2020, but the nature of the economic relationship between the EU and UK remains uncertain, and there is no guarantee that both parties will be able to reach an agreement before the transition period expires. Additionally, the UK will likely negotiate trade deals with other partners, including the terms of withdrawal, the terms of future trading and relations and any potential transition periods.United States. Brexit has created significant instability and volatility in the global financial markets, has led to significant weakening of the British pound compared to the U.S. dollar and other currencies, and could adversely affect European or worldwide economic or market conditions. Although it is unknown what the future trading terms with the EU will be, they may impair the ability of our operations in the EU to transact business in the future in the UK, and similarly the ability of our UK operations to transact business in the future in the EU. Specifically, it is possible that there will be greater restrictions on imports and exports, including possible tariffs, between the UK and EU countries, increased restrictions on freedom of movement for employees, and increased regulatory complexities. Future trading terms between the UK and other trading partners are also unknown. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. Further, among other things,We are actively monitoring Brexit could reduce consumer spending inupdates from a government and regulatory perspective. We are preparing for a “hard (no confirmed trading deal with the EU) Brexit", which is intended to ensure we meet both applicable EU and UK andregulatory requirements as well as stock-builds to secure supply continuity. There can be no assurances, however, that these preparations will be sufficient or that the EU, which could result in decreased demand for our products.final exit terms will be as we anticipate. Any of thesethe above mentioned effects of Brexit, and others we cannot anticipate, could adversely affect our business, business opportunities, operations, and financial results.
While the challenging global economic environment has not had a material impact on our liquidity or capital resources, there can be no assurance that possible future changes in global financial markets and global economic conditions will not affect our liquidity or capital resources, impact our ability to obtain financing, or decrease the value of our assets.
The challenging economic conditions have also impacted the movements in exchange rates, which have experienced significant recent volatility. Uncertainty regarding the future growth rates between countries, the influence of central bank actions, and the changing political environment globally may contribute to continued high levels of exchange rate volatility, which could have an adverse impact on our results.
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• | Our customers could be adversely impacted if U.S. economic conditions worsen. Our CSCA segment does not advertise our store brand products like national brand companies and thus is largely dependent on retailer promotional activities to drive sales volume and increase market share.If our customers do not have the ability to invest in store brand promotional activities, our sales may suffer. Additionally, while we actively review the credit worthiness of our customers and suppliers, we cannot fully predict to what extent they may be negatively impacted by slowing economic growth. |
Our customers could be adversely impacted if economic conditions worsen. Our CHCA segment does not advertise its products like national brand companies and thus is largely dependent on retailer promotional activities to drive sales volume and increase market share.If our customers do not have the ability to invest in store brand promotional activities, our sales may suffer. Additionally, while we actively review the credit worthiness of our customers and suppliers, we cannot fully predict to what extent they may be negatively impacted by slowing economic growth.Perrigo Company plc- Item 1A
Risk Factors
The international scope of our business exposes us to risks associated with foreign exchange rates.
We report our financial results in U.S. dollars. However, a significant portion of our net sales, assets, indebtedness and other liabilities, and costs are denominated in foreign currencies. These currencies include, among others, the euro,Euro, Indian rupee, British pound, Canadian dollar, Israeli shekel, Australian dollar, and Mexican peso. The addition of Omega,Our Branded Consumer Self-care business is a euro-denominated business that represents a significant portion of our net sales, andnet earnings and a substantial portion of our net assets, has significantly increased our exposure to changes in the euro/U.S. dollar exchange rate. Approximately 34% of Omega’s sales are in other foreign currencies, with the majority of the product costs for these markets denominated in euros.assets.
In addition, several emerging market economies are particularly vulnerable to the impact of rising interest rates, inflationary pressures, weaker oil and other commodity prices, and large external deficits. While some of
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these jurisdictions are showing signs of stabilization or recovery, others continue to experience levels of stress and volatility. Risks in one country can limit our opportunities for portfolio growth and negatively affect our operations in another country or countries. As a result, any such unfavorable conditions or developments could have an adverse impact on our operations. Our results of operations and, in some cases, cash flows, have in the past been, and may in the future be, adversely affected by movements in exchange rates. In addition, we may also be exposed to credit risks in some of those markets.We may implement currency hedges or take other actions intended to reduce our exposure to changes in foreign currency exchange rates. If we are not successful in mitigating the effects of changes in exchange rates on our business, any such changes could materially impact our results.
Litigation and Insurance Risks
We are or may become involved in lawsuits and may experience unfavorable outcomes of such proceedings.
We may become involved in lawsuits arising from a wide variety of commercial, manufacturing, development, marketing, sales and other business-related matters, including, but not limited to, competitive issues, pricing, contract issues, intellectual property matters, false advertising, unfair competition, taxation matters, workers' compensation, product quality/recall, environmental remediation, securities law, disclosure, and regulatory issues. Litigation is unpredictable and can be costly. We intend to vigorously defend against any lawsuits, however, we cannot predict how the cases will be resolved. Adverse results in the cases could result in substantial monetary judgments. No assurance can be made that litigation will not have a material adverse effect on our financial position or results of operations in the future (refer to Item 8. Note 1617 for more information on specific ongoing litigation)).
We may be subject to liability if our products violate applicable laws or regulations in the jurisdictions where our products are distributed. The successful assertion of product liability or other product-related claims against us could result in potentially significant monetary damages, and we could incur substantial legal expenses. Even if a product liability or consumer fraud claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation may suffer.
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• | We may face environmental exposures including, for example, those relating to discharges from and materials handled as part of our operations, the remediation of soil and groundwater contaminated by hazardous substances or wastes, and the health and safety of our employees. While we do not have any material remediation liabilities currently outstanding, weWe may in the future face liability for the costs of investigation, removal or remediation of certain hazardous substances or petroleum products on, under or in our currently or formerly owned property, or from a third-party disposal facility that we may have used, without regard to whether we knew of, or caused, the presence of the contaminants. The actual or alleged presence of these substances, or the failure to remediate them, could have adverse effects, including, for example, substantial investigative or remedial obligations and limitations on our ability to sell or rent affected property or to borrow funds using affected property as collateral. There can be no assurance that environmental liabilities and costs will not have a material adverse effect on us. See Item 1. Business - Information Applicable to All Reportable Segments - Environmental for more information. |
Our CHCI segmentCSCI and CSCA segments regularly makesmake advertising claims regarding the effectiveness of itstheir products, which we are responsible for defending. An unsuccessful defense of a product-related claimsclaim could result in potentially significant monetary damages and substantial legal expenses. Even if a claim is unsuccessful, not merited, or not fully pursued, we may still incur substantial legal expenses defending against such a claim, and our reputation could suffer.
Additionally, we may beare the target of claims asserting violations of securities fraud and derivative actions, or other litigation proceedings, and may be in the future.
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Risk Factors
Increased scrutiny on pricing practices and competition in the pharmaceutical industry, including antitrust enforcement activity by government agencies and class action litigation, may have an adverse impact on our business and results of operations.
There has been increased scrutiny regarding sales, marketing, and pricing practices in the pharmaceutical industry, from both government agencies and the media, including allegations of “price gouging” and/or collusion. This includes recent U.S. Congressional inquiries and hearings in connection with the investigation of specific price increases by several pharmaceutical companies, proposed and enacted legislation seeking greater transparency in drug pricing, and criminal antitrust investigations regarding drug pricing. U.S. federalpricing, multiple civil antitrust litigations initiated by governmental and state prosecutors have issued subpoenas to a number ofprivate plaintiffs against pharmaceutical companies seeking information about their drug pricing practices,manufacturers and several class action lawsuits have been filed that allege price-fixing with respect to various pharmaceutical products. In December 2016, the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) filed criminal charges against two former executives from a competitor of the Company for their roles in conspiracies to fix prices, rig bidsindividuals, and allocate customers for certain generic drugs.media reports.
On May 2, 2017, we disclosed that search warrants were executed at a number ofseveral Perrigo facilities and other locations in connection with the Antitrust Division’s ongoing investigation related to drug pricing in the pharmaceutical industry. Although no charges have been brought to date against Perrigo or any of our current employees (or, to the best of our knowledge, former employees), we take the investigation very seriously.
If criminal antitrust charges are filed involving Perrigo, we would incur substantial litigation and other costs, and could face substantial monetary penalties, injunctive relief, negative publicity and damage to our reputation. Regardless of the ultimate outcome, responding to those charges would divert management’s time and attention and could impair our operations. Further, we cannot predict whether legislative or regulatory changes may result from the ongoing public scrutiny of our industry, what the nature of any such changes might be, or what impact they may have on Perrigo. Any of these developments could have a material adverse impact on our business, results of operations, and reputation. While we intend to defend these lawsuits vigorously, any adverse decision could have a material adverse impact on our business, results of operations and reputation.
We are cooperating with the government’s investigation and are committed to operating our business in compliance with all applicable laws and regulations and the highest standards of ethical conduct. We do not condone, and will not countenance, any violation of these standards by our employees, agents, and business partners.
In addition, we have been named as a co-defendant with certain other generic pharmaceutical manufacturers in a number of class action lawsuits alleging that we engaged in anti-competitive behavior to fix or raise the prices of certain drugs starting, in some instances, as early as June 2013 (refer to Item 8. Note 17). While we intend to defend these lawsuits vigorously, any adverse decision could have a material adverse impact on our business, results of operations and reputation.
Publishing earnings guidance subjects us to risks, including increased stock volatility, that could lead to potential lawsuits by investors.
Because we publish earnings guidance, we are subject to a number ofseveral risks. Actual results may vary from the guidance we provide investors from time to time, such that our stock price may decline following, among other things, any earnings release or guidance that does not meet market expectations.
It has become increasingly commonplace for investors to file lawsuits against companies following a rapid decrease in market capitalization. We have been in the past, are currently, and may be in the future, named in these types of lawsuits. These types of lawsuits can be costly and divert management attention and other resources away from our business, regardless of their merits, and could result in adverse settlements or judgments, which could have a material impact on the Company.
Third-party patents and other intellectual property rights may limit our ability to bring new products to market and may subject us to potential legal liability, causing us to incur significant costs.
The manufacture, use and sale of new products that are the subject of conflicting patent rights have been the subject of substantial litigation in the pharmaceutical industry.
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Risk Factors
As a manufacturer of generic pharmaceutical products, the ability of our CHCA and RX segments to bring new products to market is often limited by third-party patents or proprietary rights and regulatory exclusivity periods awarded on products. Launching new products prior to resolution of intellectual property issues may result in us incurring legal liability if the related litigation is later resolved against us. The cost and time for us to develop prescription and Rx-to-OTC switch products is significantly greater than the rest of the new products that we introduce. Any failure to bring new products to market in a timely manner could cause us to lose market share, and our operating results could suffer.
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• | As a manufacturer of generic pharmaceutical products, the ability of our CSCA, CSCI, and RX segments to bring new products to market is often limited by third-party patents or proprietary rights and regulatory exclusivity periods awarded on products. Launching new products prior to resolution of intellectual property issues may result in us incurring legal liability if the related litigation is later resolved against us. The cost and time for us to develop prescription and Rx-to-OTC switch products is significantly greater than the rest of the new products that we introduce. Any failure to bring new products to market in a timely manner could cause us to lose market share, and our operating results could suffer. |
We could have to defend against charges that we violated patents or proprietary rights of third parties. This could require us to incur substantial expense and could divert significant effort of our technical and management personnel. If we are found to have infringed on the rights of others, we could lose our right to develop or manufacture some products or could be required to pay monetary damages or royalties to license proprietary rights from third parties. Additionally, if we choose to settle a dispute through licensing or similar arrangements, the costs associated with these arrangements may be substantial and could include ongoing royalties. An adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing and selling a number of our products.
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• | At times, our CSCA or RX segments may seek approval to market drug products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable or would not be infringed by our products. In these cases, we may face significant patent litigation. Depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a generic pharmaceutical product while litigation is pending, before any court decision, or while an appeal of a lower court decision is pending, known as an "at risk" launch. The risk involved in an "at risk" launch can be substantial because, if a patent holder ultimately prevails, the remedies available to the patent holder may include, among other things, damages measured by the profits lost by the holder, which are often significantly higher than the profits we make from selling the generic version of the product. By electing to proceed in this manner, we could face substantial damages if we receive an adverse final court decision. In the case where a patent holder is able to prove that our infringement was "willful" or "exceptional," under applicable law, the patent holder may be awarded up to three times the amount of its actual damages or we may be required to pay attorneys’ fees. |
At times, our CHCA or RX segments may seek approval to market drug products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable or would not be infringed by our products. In these cases we may face significant patent litigation. Depending upon a complex analysis of a variety of legal and commercial factors, we may, in certain circumstances, elect to market a generic pharmaceutical product while litigation is pending, before any court decision, or while an appeal of a lower court decision is pending, known as an "at risk" launch. The risk involved in an "at risk" launch can be substantial because, if a patent holder ultimately prevails, the remedies available to the patent holder may include, among other things, damages measured by the profits lost by the holder, which are often significantly higher than the profits we make from selling the generic version of the product. By electing to proceed in this manner, we could face substantial damages if we receive an adverse final court decision. In the case where a patent holder is able to prove that our infringement was "willful" or "exceptional," under applicable law, the patent holder may be awarded up to three times the amount of its actual damages or we may be required to pay attorneys’ fees.
The success of certain of our products depends on the effectiveness of measures we take to protect our intellectual property rights and patents.
If we fail to adequately protect our intellectual property, competitors may manufacture and market similar products.
We have been issued patents covering certain of our products, and we have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries. Any existing or future patents issued to or licensed by us may not provide us with any significant competitive advantages for our products or may even be challenged, invalidated, or circumvented by competitors. In addition, patent rights may not prevent our competitors from developing, using, or commercializing non-infringing products that are similar or functionally equivalent to our products.
We also rely on trade secrets, unpatented proprietary know-how, and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees, and consultants. If these agreements are breached, we may not have adequate remedies for any such breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, trade secrets and proprietary technology may otherwise become known or be independently developed by competitors or, if patents are not issued with respect to products arising from research, we may not be able to maintain the value of such intellectual property rights.
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Risk Factors
Significant increases in the cost or decreases in the availability of the insurance we maintain could adversely impact our financial condition.
To protect the Company against various potential liabilities, we maintain a variety of insurance programs, including property, general, and product, and directors' and officers' liability. We may reevaluate and change the types and levels of insurance coverage that we purchase. We are self-insured when insurance is not available or not available at reasonable premiums. Risks associated with insurance plans include:
Perrigo Company plc- Item 1A
Risk Factors
Insurance costs could increase significantly, or the availability of insurance may decrease, either of which could adversely impact our financial condition;
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• | Deductible or retention amounts could increase, or our coverage could be reduced in the future and to the extent losses occur, there could be an adverse effect on our financial results depending on the nature of the loss and the level of insurance coverage we maintained; Insurance may not be available to us at an economically reasonable cost or our insurance may not adequately cover our liability in connection with claims brought against us; and to the extent losses occur, there could be an adverse effect on our financial results depending on the nature of the loss and the level of insurance coverage we maintained (refer to Item 8. Note 16 for further information related to legal proceedings); |
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• | Product liability insurance may not be available to us at an economically reasonable cost (or at all for certain specific products) or our insurance may not adequately cover our liability in connection with product liability claims (refer to Item 8. Note 16 for further information related to legal proceedings); and |
As our business inherently exposes us to claims, for injuries allegedly resulting from the use of our products, we may become subject to claims for which we are not adequately insured. Unanticipated payment of a large claim may have a material adverse effect on our business.
Tax Related Risks
The resolution of uncertain tax positions, including the Notices of Proposed Adjustments and Notice of Assessment, could be unfavorable, which could have an adverse effect on our business.
Although we believe that our tax estimates are reasonable and that our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audit or any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made and in future periods after the determination. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties or interest assessments.
We are currently involved in several audits and adjustment-related disputes, including related litigation. This includes litigation in the United States District Court for the Western District of Michigan regarding our fiscal years ended June 27, 2009, June 26, 2010, June 25, 2011, and June 30, 2012. The United States District Court for the Western District of Michigan has scheduled a trial date in late May 2020 in response to our complaint filed on August 15, 2017 to recover $163.6 million of Federal income tax, penalties and interest assessed and collected by the IRS. Additionally, the IRS has proposed adjustments regarding the deductibility of interest for the years ended June 29, 2013, June 28, 2014, and June 27, 2015 and the IRS has proposed adjustments regarding litigation costs and transfer pricing positions for Athena Neuroscience, Inc. ("Athena"), a subsidiary of Elan acquired in 1996, for the years ended December 31, 2011, December 31, 2012 and December 31, 2013. We are also involved in litigation with Irish Revenue for the years ended December 31, 2012 and December 31, 2013.
On August 22, 2019, we received a draft NOPA from the IRS with respect to our fiscal tax years ended June 28, 2014 and June 27, 2015, relating to the deductibility of interest on $7.5 billion in debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms'-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately $170.0 million, excluding interest and penalties. In addition, we would expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond December 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed.
Following receipt of the draft NOPA, Perrigo provided the IRS with a detailed written response on September 20, 2019. That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms'-length rates for comparable debt and explained why the exam team’s analyses
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and conclusions were both factually and legally misguided. Based on discussions with the IRS, we had believed that the IRS staff would take our submission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions, IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we currently expect that we will receive a final NOPA regarding this matter that proposes substantially the same adjustments described in the draft NOPA.
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2011, 2012 and 2013. The NOPA carries forward the IRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena’s in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation.
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners ("Irish Revenue") for the years ended December 31, 2012 and December 31, 2013. The audit finding letter relates to the tax treatment of the 2013 sale of the Tysabri® intellectual property and other assets related to Tysabri® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") on November 29, 2018, which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties.
We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based on our belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself. The High Court has scheduled a hearing in this judicial review proceeding in April 2020, and we would expect a decision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings, the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before the Tax Appeals Commission have been stayed until a decision on the judicial review application has been made. If for any reason the judicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to challenge the merits of the NoA before the Tax Appeals Commission.
We regularly assess the likelihood of adverse outcomes resulting from tax examinations to determine the adequacy of our tax reserves. We believe that, based on a review of the relevant facts and circumstances, this matter will not result in a material impact on our consolidated financial position, results of operations or cash flows. However, while we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is ultimately resolved unfavorably it would have a material adverse impact on us, including on liquidity and capital resources. We will consider the financial statement impact of any additional facts as they become available.
In addition, going forward, uncertainty regarding the future outcome of tax disputes such as the NoA or draft or final NOPA may have an adverse impact on our strategy and the results of such tax disputes may have an adverse impact on our financial condition and liquidity.
At this time, we cannot predict the outcome of any audit or related litigation. Unfavorable developments in or resolutions of matters such as those discussed above could, individually or in the aggregate, have a material impact on our Consolidated Financial Statements in future periods (refer to Item 8, Note 15 for further information related to uncertain tax positions and ongoing tax audits and Item 8. Note 17 for further information related to legal proceedings). In addition, an adverse result with respect to any of these matters could ultimately require the use of Perrigo Company plc- Item 1A
Risk Factors
corporate assets to pay assessments and related interest, penalties or other amounts, and any such use of corporate assets would limit the assets available for other corporate purposes.
The U.S. Internal Revenue Service ("IRS") may not agree with the conclusion that we are treated as a foreign corporation for U.S. federal tax purposes.
Although we are incorporated in Ireland, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to section 7874 of the U.S. Internal Revenue Code of 1986, as amended ("Code"). For U.S. federal tax purposes, a corporation generally is considered a tax resident in the jurisdiction of its organization or incorporation. Because we are an Irish incorporated entity, we would generally be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874 of the Code provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal tax purposes.
For Perrigo Company plc to be treated as a foreign corporation for U.S. federal tax purposes under section 7874 of the Code, either (i) the former stockholders of Perrigo Company must own (within the meaning of section 7874 of the Code) less than 80% (by both vote and value) of our stock by reason of holding shares in Perrigo Company (the "ownership test") as of the closing of the Elan acquisition or (ii) we must have substantial business activities in Ireland after the Elan acquisition (taking into account the activities of our expanded affiliated group).
Upon our acquisition of Elan, Perrigo Company stockholders held 71% (by both vote and value) of our shares. As a result, we believe that under current law, we should be treated as a foreign corporation for U.S. federal tax purposes. However, we cannot assure that the IRS will agree with our position that the ownership test is satisfied. There is limited guidance regarding the section 7874 provisions, including the application of the ownership test. An unfavorable determination on Perrigo Company plc’s treatment as a foreign corporation under section 7874 of the Code could have a material impact on our consolidated financial statementsConsolidated Financial Statements in future periods.
Based on the limited guidance available, we currently expect that Section 7874 of the Code likely will limit our and our U.S. affiliates’ ability to use their U.S. tax attributes, such as net operating losses, to offset certain U.S. taxable income, if any, generated by the Elan acquisition or certain specified transactions for a period of time following the Elan acquisition (refer to Item 8,8. Note 1415).
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Risk Factors
Changes to tax laws could have a material adverse effect on our results of operations and the ability to utilize cash in a tax efficient manner.
We believe that under current law, we should be treated as a foreign corporation for U.S. federal tax purposes. However, any of the following could adversely affect our status as a foreign corporation for U.S. federal tax purposes:
Changes to the inversion rules in section 7874 of the Code, the IRS Treasury regulations promulgated thereunder, or other IRS guidance; and
Legislative proposals aimed at expanding the scope of U.S. corporate tax residence.
On April 4, 2016,Since our acquisition of Elan in 2013, the United States Treasury ("Treasury") and the IRS have issued a packagenumber of Notices and proposed, temporary, and final regulations, that incorporateincluding most recently, on July 12, 2018, new final regulations addressing various aspects of section 7874 and related provisions, including guidance to address certain specific post-inversion transactions. All the guidance promised in the 2014Notices and 2015 notices and provide other rules. These temporary regulations are generallyeither effective for certain inversion transactions completed ondates after the Elan acquisition occurred or after November 19, 2015 or, in certain cases, to certain specified post-inversion transactions occurring after that date provided that an inversion transaction had occurred on or after September 22, 2014. We do not provide guidance that we believe that those regulations would apply to our transaction, which occurred prior to those effective dates. Treasury and the IRS also issued final regulationshave a material impact on June 3, 2015, which address the “substantial business activities” test of Section 7874 of the Code. We believe that those regulations, which have an effective date of June 4, 2015, also do not impact the treatment of our status as a foreign corporation under Section 7874, as our transaction also occurred prior to the effective date of those final regulations.corporation.
On October 16, 2016, Treasury released final regulations regarding corporate tax inversions and related earnings stripping. These final regulations include provisions that may be interpreted to impact otherwise common tax structures including intercompany financing and obligations. We believe that these regulations do not materially impact our intercompany financing and obligations. Treasury has indicated that they will continue to study certain portions of the proposed regulations that were not finalized, and we will evaluate the impacts of any additional guidance or regulations to our cross-border treasury management practices and intercompany financing structures at that time. We have no assurance that such guidance, if any, will not impact our ability to utilize existing or similar structures in the future.
The Organization for Economic Co-operation and Development (“OECD”), which represents a coalition of member countries, has recommended changes to numerous long-standing tax principles relating to Base Erosion and Profit Shifting ("BEPS"). These changes are being adopted and implemented by many of the countries in which we do business and may increase our taxestax expense in these countries. In addition, the European Commission has launched several initiatives to implement BEPS actions including an anti-tax avoidance directive ("ATADI & II") and having a common (consolidated) corporate tax base. It is unclear at present if and how these initiatives will beFor example, Ireland implemented "controlled foreign corporation legislation" effective January 1, 2019 as required by the EU countries. Specifically, Ireland is embarking on a consultation process to implement the ATAD & II directivesAnti-Tax Avoidance Directive ("ATAD") and BEPS related measures. The shapeeffective January 1, 2020 has implemented "anti-hybrid legislation." Such OECD initiatives, changes
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in domestic legislation, introduction of this reform may adversely impact our consolidated effective tax rate.
On December 25, 2017, Belgium enacted aEU Directives and general global tax reform bill (“Belgium Tax Act”) providing for a simplified tax system including, among other items, a corporate income tax rate reduction from 33%are actively monitored to 29%ensure we adhere to all laws and regulations in 2018 (and to 25% from 2020) and an increaseall jurisdictions in the participation exemption on qualifying dividends from 95% to 100% (refer to Item 8, Note 14 for further information related to the Belgium Tax Act).which we operate.
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“U.S. Tax Act”).Act. The U.S. Tax Act includes a number ofseveral significant changes to existing U.S. tax laws that impact us. These changes include a corporate income tax rate reduction from 35% to 21%, full expensing of fixed assets placed in service in 2018 and the elimination or reduction of certain U.S. deductions and credits, including limitations on the deductibility of interest expense and executive compensation. The U.S. Tax Act also transitions international taxation from a worldwide system to a modified territorial system. This modified territorial system includes, among other items, base erosion prevention measures which have the effect of subjecting certain earnings of our U.S. owned foreign corporations to U.S. taxation as global intangible low-taxed income (“GILTI”) and the establishment of a minimum tax on certain payments from our U.S. subsidiaries to related foreign persons as base erosion and anti-abuse tax (“BEAT”). These changes arebecame effective beginning in 2018. The U.S. Tax Act also includes a one-time mandatory deemed repatriation tax on accumulated U.S. owned foreign
Perrigo Company plc- Item 1A
Risk Factors
corporations’ previously untaxed foreign earnings (“Transition Toll Tax”). The Transition Toll Tax willcan be paid over an eight-year period starting in 2018 and will not accrue interest. Based on the 2017 U.S. federal income tax return filed by the Company, the Transition Toll Tax was paid in full with the 2017 U.S. federal income tax return. During 2018, Treasury and the IRS issued various forms of guidance, including notices of proposed rule making and proposed Treasury regulations, implementing and clarifying aspects of the U.S. Tax Act and other related topics, such as:
Transition Toll Tax;
BEAT;
GILTI;
Foreign tax credit computations;
The full expensing of fixed assets placed in service in 2018;
Interest expense limitations under Section 163(j);
Deductibility of interest and/or royalty payments made by U.S. corporate taxpayers to foreign related parties in so-called “hybrid mismatch” arrangements under Section 267A; and
The limitation of deductions for key executive compensation as determined under Section 162(m).
During the year ended December 31, 2018, we considered and evaluated Treasury and IRS guidance issued as described above and reflected certain changes in our income tax provision for 2018. In 2019, Treasury and the IRS issued final tax regulations (“Final Regulations”) on certain code sections that were introduced by, or changed as a result of, the U.S. Tax Act. The Final Regulations issued in 2019 did not result in material changes to the tax effect recorded in prior periods when proposed regulations were issued. We will continue to record the tax effects of any further proposed regulations in the quarters in which they are issued.
Our preliminary estimate of the impact of the U.S. Tax Act (including the Transition Toll Tax) iswas recorded as of December 31, 2017 and was subject to the finalization of management's analysis related to certain matters, such as developing interpretations of the provisions of the U.S. Tax Act, changes to certain estimates and amounts related to the earnings and profits of certain U.S. owned foreign subsidiaries and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the U.S. Tax Act may requirerequired further adjustments and changes in our 2017 estimates, which coulddid not have a material adverse effect on our business, results of operations or financial conditions. The final determination of the impact of the U.S. Tax Act (including the Transition Toll Tax) will bewas completed in 2018, as additional information becomes available, but no later than one year from the enactment of the U.S. Tax Actrequired by SAB 118 (refer to Item 8, Note 1415 for further information related to the U.S. Tax Act)).
Any of these changes could have a prospective or retroactive application to us, our shareholders, and affiliates, and could adversely affect us by changing our effective tax rate and limiting our ability to utilize cash in a tax efficient manner.
Perrigo Company plc- Item 1A
Risk Factors
Our effective tax rate or cash tax payment requirements may change in the future, which could adversely impact our future results from operations.
A number of factors may adversely impact our future effective tax ratesrate or cash tax payment requirements, which may impact our future results and cash flows from operations (refer toItem 8.8, Note 1415for further information related to Income Taxes)). These factors include, but are not limited to:
Changes to tax laws or the interpretation of such tax laws (including additional proposals for fundamental international tax reform)reform in a number of jurisdictions globally);
Income tax rate changes by governments;
The jurisdictions in which our profits are determined to be earned and taxed;
Changes in the valuation of our deferred tax assets and liabilities;
Adjustments to estimated taxes upon finalization of various tax returns;
Adjustments to our interpretation of transfer pricing standards, treatment or characterization of intercompany transactions, changes in available tax credits, grants and other incentives;
Changes in stock-based compensation expense;
Changes in U.S. generally accepted accounting principles;
Expiration or the inability to renew tax rulings or tax holiday incentives; and
Divestitures of current operations; andoperations.
Repatriation of non-U.S. earnings with respect to which we have not previously provided for U.S. taxes.
The resolution of uncertain tax positions could be unfavorable, which could have an adverse effect on our business.
Although we believe that our tax estimates are reasonable and that our tax filings are prepared in accordance with all applicable tax laws, the final determination with respect to any tax audit or any related litigation could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made and in future periods after the determination. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties or interest assessments.
We are currently involved in several audit and adjustment related disputes, including litigation, with the Internal Revenue Service (“IRS”). These include litigation regarding our 2009, 2010, 2011, and 2012 tax years, as well as proposed audit adjustments related to litigation costs and transfer pricing positions related to Athena Neurosciences, Inc. (“Athena”), a subsidiary of Elan acquired in 1996, for the 2011, 2012 and 2013 tax years.
Perrigo Company plc- Item 1A
Risk Factors
At this time, we cannot predict the outcome of any audit or related litigation. Unfavorable resolutions of the audit matters discussed above could have a material impact on our consolidated financial statements in future periods. (refer to Item 8. Note 14 for further information related to uncertain tax positions and ongoing tax audits and Item 8. Note 16 for further information related to legal proceedings).
Risks Related to Capital and Liquidity Risks
Our historical failure to timely file our periodic reports with the SEC may limit our options in accessing the public markets to raise debt or equity capital, which in turn may limit our ability to pursue future transactions or strategies.
We did not timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 or our Quarterly Report on Form 10-Q for the quarter ended April 1, 2017. As a result, there currently are limits on our ability to access the public markets. For example, we are not eligible to use Form S-3 until we establish the required history of making timely filings for twelve full calendar months. The ability to use Form S-3 to register public offerings in the United States offers certain benefits, such as relatively lower costs and shorter time-frames to prepare a registration statement and cause it to become effective, which may enhance our ability to take advantage of positive market conditions as they develop. The limited availability of access to the public markets could increase the time and costs related to raising capital or prevent us from pursuing transactions or implementing future business strategies. We expect we will again become eligible to use Form S-3 as of June 1, 2018; however, any failure by us to timely file one or more of our periodic reports or otherwise remain current in our SEC reporting requirements may further inhibit our ability to access the public markets.
Our indebtedness could adversely affect our ability to implement our strategic initiatives.
We anticipate that cash, cash equivalents, cash flows from operations, and borrowings available under our credit facilities will substantially fund working capital and capital expenditures. Our business requires continuous capital investments, and there can be no assurance that financial capital will always be available on favorable terms or at all. Additionally, our leverage and debt service obligations could adversely affect the business. At December 31, 2017,2019, our total indebtedness outstanding was $3.3$3.4 billion.
Our senior credit facilities, the agreements governing our senior notes, and agreements governing our other indebtedness contain a number of restrictions and covenants that limit our ability to make distributions or other payments to our investors and creditors unless certain financial tests or other criteria are satisfied.
We also must comply with certain specified financial ratios and tests. These restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities, such as acquisitions. If we do not comply with the covenants and restrictions contained in our senior credit facilities, agreements governing our senior notes, and agreements governing our other indebtedness, we could be in default under those agreements, and the debt, together with accrued interest, could then be declared immediately due and payable.
Any default under our senior credit facilities or agreements governing our senior notes or other indebtedness could lead to an acceleration of debt under other debt instruments that contain cross-acceleration or cross-default provisions. If our indebtedness is accelerated, there can be no assurance that we would be able to repay or refinance our debt or obtain sufficient new financing.
Downgrades to our credit ratings may limit our access to capital and materially increase borrowing costs on current or future financing, including via trade payables with vendors. Customers' inclination to purchase goods from us may also be affected by the publicity associated with deterioration of our credit ratings.
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• | There are various maturity dates associated with our credit facilities, senior notes, and other debt facilities. There is no assurance that cash, future borrowings or equity financing will be available for the payment or refinancing of our indebtedness. Further, there is no assurance that future refinancing or renegotiation of our senior credit facilities, senior notes or other debt facilities, or additional agreements will not have materially different or more stringent terms (refer toItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). |
Perrigo Company plc- Item 1A
Risk Factors
We cannot guarantee that we will buy back our ordinary shares pursuant to our announced share repurchase plan or that our share repurchase plan will enhance long-term shareholder value.
In
Following the expiration of our 2015 share repurchase plan authorization (the "2015 Authorization"), in October 2015,2018 our Board of Directors authorized a $2.0up to $1.0 billion three-yearof share repurchases with no expiration date (the "2018 Authorization"), subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase plan. During the three months endedprogram. Through December 31, 2015,2018, we repurchased a total of 7.8 million ordinary shares through the plan totaling $500.0 million. During 2016, we did not purchase any shares in the open market. During 2017, we repurchased $191.5 million worth of shares.prior 2015 Authorization. The specific timing and amount of buybacks under the 2018 Authorization, if any, will depend upon several factors, including market and business conditions, the trading price of our ordinary shares, and the nature of other investment opportunities.opportunities and the availability of distributable reserves of Perrigo Company plc. Buybacks of our ordinary shares pursuant to our share repurchase plan could affect the market price of our ordinary shares or increase their volatility. Additionally, our share repurchase plan could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Although our share repurchase plan is intended to enhance long-term shareholder value, there is no assurance that it will do so, and short-term share price fluctuations could reduce the plan’s effectiveness.
Any additional shares we may issue could dilute your ownership in the Company.
Under Irish law, our authorized share capital can be increased by an ordinary resolution of our shareholders, and the directors may issue new ordinary or preferred shares up to a maximum amount equal to the authorized but unissued share capital, without shareholder approval, once authorized to do so by the articles of association or by an ordinary resolution of our shareholders.
Subject to specified exceptions, Irish law grants statutory preemption rights to existing shareholders to subscribe for new issuances of shares for cash, but allows shareholders to authorize the waiver of the statutory preemption rights either in our articles of association or by way of a special resolution withresolution. Such disapplication of these preemption rights can either be generally applicable or be in respect to anyof a particular allotment of shares.
Our articlesAt our annual general meeting of association contain, as permitted by Irish company law, a provision authorizingshareholders in April 2019, our shareholders authorized our Board of Directors to issue newup to a maximum of 33% of our issued ordinary capital on that date for a period of 18 months from the passing of the resolution. At the annual general meeting, our shareholders also authorized our Board of Directors to issue ordinary shares on a nonpreemptive basis in the following circumstances: (i) an issuance of shares in connection with any rights issuance and (ii) an issuance of shares for cash, without offering preemption rights. The authorizationif the issuance is limited to up to 5% of the directors to issue shares andCompany’s issued ordinary share capital (with the authorizationpossibility of issuing an additional 5% of the waiverCompany’s issued ordinary share capital provided the Company uses it only in connection with an acquisition or a specified capital investment that is announced contemporaneously with the issuance, or which has taken place in the preceding six-month period and is disclosed in the announcement of the statutory preemption rights must bothissuance), bringing the total acceptable limit to 10% of the Company’s issued ordinary share capital. Once these authorizations expire, we cannot provide any assurance that they will be renewed by the shareholders at least every five years, and we cannot provide any assurance that these authorizations will always be approved,subsequent annual general meetings, which could limit our ability to issue equity and thereby adversely affect the holders of our securities.
We are incorporated in Ireland; Irish law differs from the laws in effect in the United States and may afford less protection to, or otherwise adversely affect, our shareholders.
As an Irish company, we are governed by the Irish Companies Act 2014 (the "Act"). The Act differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including the provisions relating to interested directors, mergers, amalgamations and acquisitions, takeovers, shareholder lawsuits, and indemnification of directors.
Under Irish law, the duties of directors and officers of a company are generally owed to the company only. As a result, shareholders of Irish companies do not have the right to bring an action against the directors or officers of a company, except in limited circumstances.
Depending on the circumstances, shareholders may be subject to different or additional tax consequences under Irish law as a result of the acquisition, ownership and/or disposition of ordinary shares, including, but not limited to, Irish stamp duty, dividend withholding tax, Irish income tax, and capital acquisitions tax.
Perrigo Company plc- Item 1A
Risk Factors
There is no treaty between Ireland and the U.S. providing for the reciprocal enforcement of foreign judgments. Before a foreign judgment would be deemed enforceable in Ireland, the judgment must be (i) for a definite sum, (ii) provided by a court of competent jurisdiction and be for a(iii) final and conclusive sum.conclusive. An Irish courtHigh Court may exercise its right to refuse to recognize and enforce a foreign judgment if the foreign judgment was obtained by fraud, if it violated Irish public policy, if it is in breach of natural justice, or if it is irreconcilable with an earlier judgment.
Perrigo Company plc- Item 1A
Risk Factors
An Irish courtHigh Court may stay proceedings if concurrent proceedings are being brought elsewhere. Judgments of U.S. courts of liabilities predicated upon U.S. federal securities laws may not be enforced by Irish courtsHigh Courts if deemed to be contrary to public policy in Ireland.
We are subject to Irish takeover rules under which our Board of Directors is not permitted to take any action without shareholder or Irish Takeover Panelapproval that might frustrate an offer for our ordinary shares once we have received an approach that may lead to an offer, or have reason to believe an offer is or may be imminent. Further, itIt could be more difficult for us to obtain shareholder approval for a merger or negotiated transaction than if we were a U.S. company because the shareholder approval requirements for certain types of transactions differ, and in some cases are greater, under Irish law.
Irish law differs from the laws in effect in the U.S. with respect to defending unwanted takeover proposals and may give our Board of Directors less ability to control negotiations with hostile offerors.
We are subject to the Irish Takeover Panel Act, 1997, Takeover Rules, 2013. Under those Irish Takeover Rules, the Board of Directors is not permitted to take any action that might frustrate an offer for our ordinary shares once the Board of Directors has received an approach that may lead to an offer or has reason to believe that such an offer is or may be imminent, subject to certain exceptions. Potentially frustrating actions such as (i) the issuance of ordinary shares, options or convertible securities, (ii) material acquisitions or disposals, (iii) entering into contracts other than in the ordinary course of business, or (iv) any action, other than seeking alternative offers, which may result in frustration of an offer, are prohibited during the course of an offer or at any earlier time during which the Board of Directors has reason to believe an offer is or may be imminent. These provisions may give the Board of Directors less ability to control negotiations with hostile offerors and protect the interests of holders of ordinary shares than would be the case for a corporation incorporated in a jurisdiction of the United States.
We may be limited in our ability to pay dividends or repurchase shares in the future.
A number of factors may limit our ability to pay dividends in the future, including:
The availability of distributable reserves, as approved by our shareholders and the Irish High Court;
Our ability to receive cash dividends and distributions from our subsidiaries;
Compliance with applicable laws and debt covenants; and
Our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant.relevant; and
The availability of Perrigo Company plc's distributable reserves, being profits of the company available for distribution to shareholders.
Under Irish law, distributable reserves are the accumulated realized profits so far as not previously utilized by distribution or capitalization, less accumulated realized losses so far as not previously written off in a reduction or a reorganization of capital duly made. In addition, no distribution or dividend may be made if, at the time of the distribution or dividend, Perrigo Company plc's net assets are not, or would not be after giving effect to such distribution or dividend, equal to, or in excess of, the aggregate of Perrigo Company plc's called-up share capital plus undistributable reserves.
While we currently expect to continue paying dividends, significant changes in our business or financial condition such as asset impairments, sustained operating losses and the selling of assets, could impact the amount of distributable reserves available to us. We could seek to create additional distributable reserves through a reduction in Perrigo Company plc's share premium, which would require 75% shareholder approval and the approval of the Irish High Court. The Irish High Court’s approval is a matter for the discretion of the court, and there can be no assurances that such approval would be obtained. In the event that additional distributable reserves are not created in this way, dividends, share repurchases or other distributions would generally not be permitted under Irish law until such time as Perrigo Company plc has created sufficient distributable reserves in our audited statutory financial statements as a result of its business activities.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
Our world headquarters is located in Dublin, Ireland, and our North American base of operations is located in Allegan, Michigan. We manufacture products at 2822 worldwide locations and have R&D, logistics, and office support facilities in many of the regions in which we operate. We own approximately 72%77% of our facilities and lease the remainder. Our primary facilities by geographic area were as follows at December 31, 2017:2019:
|
| | | | |
Country | | Number of Facilities | | Segment(s) Supported |
|
Ireland | | 12 | | CHCA, CHCI,CSCA, CSCI, RX |
United States | | 4448 | | CHCA,CSCA, CSCI, RX Other |
Mexico | | 910 | | CHCACSCA |
United Kingdom | | 78 | | CHCICSCI |
France | | 6 | | CHCICSCI |
Australia | | 4 | | CSCI |
Belgium | | 4 | | CHCICSCI |
Austria | | 4 | | CHCI |
Australia | | 3 | | CHCICSCI |
Israel | | 3 | | CHCA, CHCI,CSCA, RX |
India | | 23 | | CHCACSCA, CSCI |
Germany | | 2 | | CHCI |
Switzerland | | 2 | | CHCI |
Italy | | 1 | | CHCI |
Portugal | | 1 | | CHCICSCI |
Perrigo Company plc - Item 2
We believe that our production facilities are adequate to support the business, and our property and equipment are well maintained. Our manufacturing plants are suitable for their intended purposes and have capacities for current and near term projected needs of our existing products. As previously announced, we are making strategic investments in certain of our manufacturing plants to enhance our manufacturing capabilities.
Information regarding our current legal proceedings is presented in Item 8. Note 1617.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
Perrigo Company plc - Additional Item
Executive Officers
ADDITIONAL ITEM. INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages and positions as of February 23, 201821, 2020 were:
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| | | | |
| | Title and Business Experience | | Age |
Svend Andersen | | Mr. Andersen was named Executive Vice President and President, Consumer HealthcareSelf-Care International in February 2017. Prior to joining Perrigo in May 2016, Mr. Andersen served as Executive Vice President - Europe for LEO-Pharma from December 2015 to May 2016. Prior to that, he was Regional President and Corporate officer at Hospira, Inc.’s Europe, Middle East and Africa (“EMEA”) business for five years, was Executive Vice President responsible for the Western European division’s pharmaceuticals, generics, OTC and hospital products businesses at Actavis from 2008 to 2015 including leading Alpharma’s EMEA businesses prior to its acquisition by Actavis, and prior to that, spent 10 years with Ferrosan (A Novo Nordisk Subsidiary) specialized in OTC and consumer health products as Vice President for Global Commercial Operations. | | 58 |
James E. Dillard III | | James E. Dillard III was named Executive Vice President and Chief Scientific Officer in January 2019. Mr. Dillard joined Perrigo from Altria Group, Inc., where he served as Senior Vice President, Research, Development and Sciences and Chief Innovation Officer from January 2009 to May 2018. During his tenure with Altria Group, Mr. Dillard led the creation of the Regulatory Affairs function in 2009 and also served as Chief Innovation Officer for Altria Client Services and Senior Vice President of Research, Development & Regulatory Affairs for Altria Group. He held science and technology leadership roles with U.S. Smokeless Tobacco Company, an Altria Group Inc. operating company, from 2001 to 2009. Mr. Dillard worked for the U.S. Food and Drug Administration between 1987 and 2001 as Director of the Division of Cardiovascular and Respiratory Devices, as well as in various leadership roles in the Center for Devices and Radiological Health and the Office of Device Evaluation. | | 56 |
Thomas M. Farrington | | Mr. Farrington was named Executive Vice President and Chief Information Officer in November 2015. He formerly served as Senior Vice President and Chief Information Officer from October 2006 to November 2015. | | 6062 |
Ronald C. Janish | | Mr. Janish was named Chief Transformation Officer in January 2019 and Executive Vice President of Global Operations and Supply Chain in October 2015. He served as Senior Vice President of International and Rx Operations from 2012 until 2015 and as Managing Director of Perrigo’s Australian operations from 2010 to 2012. Previously, he held Senior Vice President roles for Perrigo in International Market Development, China Business Development and Global Procurement. | | 5254 |
Murray S. Kessler | | Mr. Kessler was appointed President, Chief Executive Officer and Board Member of Perrigo Company plc, effective October 8, 2018. Before joining Perrigo, Mr. Kessler served as the Chairman of the Board of Directors, President and CEO of Lorillard, Inc. (2010-2015). He served as Vice Chair of Altria, Inc. (2009) and President and CEO of UST, Inc. (2000-2009), a wholly owned subsidiary. Previous to his time at UST, Mr. Kessler had over 18 years of consumer packaged goods experience with companies including Vlasic Foods International, Campbell Soup and The Clorox Company. Since 2015, Mr. Kessler has served as voluntary President of the United States Equestrian Federation, a non-profit national governing body. | | 60 |
Todd W. Kingma | | Mr. Kingma was named Executive Vice President, General Counsel and Secretary in May 2006. He served as Vice President, General Counsel and Secretary from August 2003 to May 2006. | | 5860 |
Sharon Kochan | | Mr. Kochan was named Executive Vice President and President, RX Pharmaceuticals in October 2018. He served as Executive Vice President and President, Branded Consumer Healthcare and International infrom February 2017.2017 to October 2018. He served as Executive Vice President and General Manager, Consumer Healthcare International from August 2012 to February 2017. He served as Executive Vice President, General Manager of Prescription Pharmaceuticals from March 2007 to July 2012 and as Senior Vice President of Business Development and Strategy from March 2005 to March 2007. Mr. Kochan was Vice President, Business Development of Agis Industries (1983) Ltd. from July 2001 until the acquisition of Agis by the Company in March 2005. | | 49 |
James R. Michaud | | Mr. Michaud was named Executive Vice President, Chief Human Resources Officer in August 2016. In 2014, Mr. Michaud was President of Human Resources Strategies, a consulting company focused on providing business based human resource strategies to a wide variety of companies in multiple industries. His corporate career spanned senior human resource roles in Alcoa, Arcelor Mittal Steel, and most recently, Cliffs Natural Resources, where he served as Executive Vice President, Chief Human Resources Officer from 2010 to 2014. | | 6251 |
Jeffrey R. Needham | | Mr. Needham was named Executive Vice President and President of Consumer HealthcareSelf-Care Americas in October 2009. He served as Senior Vice President of Commercial Business Development for Consumer Healthcare from March 2005 through October 2009. Previously, he served as Senior Vice President of International from November 2004 to March 2005. He served as Managing Director of Perrigo’s U.K. operations from May 2002 to November 2004 and as Vice President of Marketing from 1993 to 2002. | | 6163 |
Grainne Quinn | | Ms.Dr. Quinn was named Executive Vice President in July 2016 and has served as Chief Medical Officer since November 2015. Prior to that she served as Vice President and Head of Global Patient Safety from January 2014 until November 2015. Dr. Quinn was Vice President and Head of Global Pharmacovigilance and Risk Management for Elan from April 2009 until December 2013 when the Company acquired Elan. | | 4850 |
Uwe F. Roehrhoff | | | | |
Perrigo Company plc - Additional Item
Executive Officers
|
| | | | |
| | Title and Business Experience | | Age |
Raymond P. Silcock | | Mr. RoehrhoffSilcock was appointednamed Executive Vice President and Chief ExecutiveFinancial Officer and Board Member effective January 15, 2018.in March 2019. Prior to joining Perrigo, Mr. RoehrhoffSilcock served as Chief Executive OfficerCFO at INW Holdings from 2018 to 2019 and as EVP and CFO of Gerresheimer AG,CTI Foods from 2016 to 2018. In March 2019, CTI Foods filed a leading global manufacturervoluntary petition under Chapter 11 of pharmaceutical packaging productsthe U.S. Bankruptcy Code in U.S. Bankruptcy Court in Delaware. From 2013 until the company’s sale in 2016, Mr. Silcock was EVP and medical devices for storage, dosageCFO of Diamond Foods, Inc. and safe administrationpreviously held CFO roles at UST, Inc., Swift & Co. and Cott Corporation. He also served on the board of drugs. He began his career with Gerresheimer AG in 1991 and steadily advanced to serve in a number of key leadership roles in Europe and North America, including leading the American subsidiary Gerresheimer GlassPinnacle Foods, Inc. from 2001 to 2010. He served as2008 until the company was sold in 2018. His early career was highlighted by an executive board member from 2003 to 2017, responsible for two18-year tenure in positions of increasing responsibility at Campbell Soup Company. Mr. Silcock is a Fellow of the company’s three business units, and CEOChartered Institute of Gerresheimer AG from 2010 until his retirement in August 2017. Mr. Roehrhoff served as Audit Committee Chairman on the Board of Directors of Catalent, Inc. from February 2017 to February 2018 and as deputy chairman of Klöckner&Co SE since May 2017.Management Accountants (UK). | | 5569 |
Paul WeningerRobert Willis | | Mr. WeningerWillis was named Executive Vice President of Global Quality Operationsand Chief Human Resources Officer in December 2015. He servedMarch 2019 after serving as Senior Vice President, U.S. Quality Operations from 2013 to 2015; Vice President, Consumer Healthcare and Rx Quality Operations, U.S. and Asia Pacific from 2010 to 2013; Vice President, Global CHC Quality Operations from 2007 to 2010. | | 54 |
John Wesolowski | | Mr. Wesolowski was named Executive Vice President, President RX in November 2016. He previously was named as Acting General Manager, RX, in July 2016 and served in that capacity until November 2016. Previously, he served as Senior Vice President of RX Commercial Operations, from 2013 until July 2016.Human Resources Global Businesses for nearly six years. Prior to joining Perrigo, Mr. Wesolowski joined PerrigoWillis gained more than 20 years of experience in February 2004 asHuman Resources leadership through roles with Fawaz Alhokair Group in the Vice President, RX SalesMiddle East, GE Capital in the UK and MarketingIreland, DoubleClick in North America and internationally, and Norkom Technologies in Europe and North America. He also was subsequently promoted toa Partner and Founding Member of the Senior Vice President of RX Sales and Marketing in 2012. | | 50 |
Ronald L. Winowiecki | | Mr. Winowiecki was appointed CFO in February 2018. He served as Acting CFO from February 2017 to February 2018; Senior Vice President of Business Finance from January 2014 to February 2017; Vice President for Treasury and Accounting Shared Services from September 2011 to December 2013; and the Company’s Corporate Vice President Treasurer from October 2008 to August 2011.Black & White Group. | | 51 |
Perrigo Company plc - Item 5
PART II.
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ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Prior to June 6, 2013, our common equity traded on the Nasdaq Global Select Market under the symbol PRGO. Since June 6, 2013, our common equity has traded on the New York Stock Exchange ("NYSE") under the symbol PRGO. In association with the acquisition of Agis Industries (1983) Ltd., our common equity has been trading on the Tel Aviv Stock Exchange ("TASE") since March 16, 2005.2005 under the same symbol. As of February 23, 2018,21, 2020, there were 1,4981,435 record holders of our ordinary shares.
Set forth below are the high and low sale prices for our ordinary shares on the NYSE for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | Six Months Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| High | | Low | | High | | Low | | High | | Low |
First quarter | $ | 87.48 |
| | $ | 66.29 |
| | $ | 152.36 |
| | $ | 122.62 |
| | $ | 198.42 |
| | $ | 158.35 |
|
Second quarter | $ | 77.74 |
| | $ | 65.47 |
| | $ | 133.53 |
| | $ | 84.85 |
| | $ | 167.92 |
| | $ | 140.40 |
|
Third quarter | $ | 89.87 |
| | $ | 63.68 |
| | $ | 99.14 |
| | $ | 82.50 |
| | N/A |
| | N/A |
|
Fourth quarter | $ | 91.73 |
| | $ | 79.70 |
| | $ | 97.17 |
| | $ | 79.72 |
| | N/A |
| | N/A |
|
The graph below shows a comparison of our cumulative total return with the cumulative total returns for the S&P 500 Index and the S&P Pharmaceuticals Index. The graph assumes an investment of $100 at the beginning of the period and the reinvestment of any dividends. Information in the graph is presented for the years ended December 31, 20122014 through December 31, 2017.2019.
Perrigo Company plc - Item 5
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG PERRIGO COMPANY PLC**, THE S&P 500 INDEX, AND THE S&P PHARMACEUTICALS INDEX
|
| | | | | | |
| 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 |
Perrigo Company plc | $100.00 | $147.94 | $161.60 | $140.30 | $81.18 | $85.72 |
S&P 500 | $100.00 | $132.39 | $150.51 | $152.59 | $170.84 | $208.14 |
S&P Pharmaceuticals | $100.00 | $135.23 | $165.27 | $174.84 | $172.10 | $193.74 |
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* | $100 invested on December 31, 20122014 in stock or index - including reinvestment of dividends. Indexes calculated on month-end basis. |
| |
** | Perrigo Company prior to December 18,** Perrigo Company prior to December 31, 2013. Perrigo Company plc beginning December 18, 2013. |
In January 2003, the Board of Directors adopted a policy of paying quarterly dividends. The declaration and payment of dividends and the amount paid, if any, are subject to the discretion of the Board of Directors and depend on our earnings, financial condition, capital and surplus requirements and other factors the Board of Directors may consider relevant (refer to Item 8. Note 11 for additional information on dividends paid).
In October 2015, the Board of Directors approved a three-year share repurchase plan of up to $2.0 billion. Following the expiration of our 2015 share repurchase plan authorization in October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. We did not repurchase any shares under the share repurchase plan during the three monthsyear ended December 31, 20172019. During the year ended December 31, 2018, we repurchased 5.1 million ordinary shares at an average repurchase price of $77.93 per share, for a total of $400.0 million. During the year ended December 31, 2017, we repurchased 2.7 million ordinary shares at an average repurchase price of $71.72 per share, for a total of $191.5 million. We did not repurchase any shares under the share repurchase plan during the year ended December 31, 2016. During the six months ended December 31, 2015, we repurchased 3.3 million ordinary shares at an average repurchase price of $151.59 per share, for a total of $500.0 million.
Perrigo Company plc - Item 6
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ITEM 6. | SELECTED FINANCIAL DATA |
The Consolidated Statements of Operations data set forth below with respect to the years ended December 31, 20172019, December 31, 2018, and December 31, 2016, the six months ended December 31, 2015 and December 27, 2014, and the year ended June 27, 2015,2017, and the Consolidated Balance Sheet data at December 31, 2017, December 31, 2016,2019 and December 31, 20152018 are derived from and are qualified by reference to the audited consolidated financial statements included in Item 8 of this report and should be read in conjunction with those financial statements and notes. The Consolidated Statements of Operations data set forth below with respect to the year ended June 28,December 31, 2016 and the six months ended December 31, 2015 and December 27, 2014 and the Consolidated Balance Sheet data at June 27,December 31, 2017, December 31, 2016, December 31, 2015, and June 28,December 27, 2014 are derived from audited consolidated financial statements not included in this report. | | | Year Ended | | Six Months Ended | | Year Ended | Year Ended | | Six Months Ended |
(in millions, except per share amounts) | December 31, 2017 | | December 31, 2016(1) | | December 31, 2015(2) | | December 27, 2014(3) | | June 27, 2015(4) | | June 28, 2014(5) | December 31, 2019(1) | | December 31, 2018 | | December 31, 2017 | | December 31, 2016(2) | | December 31, 2015(3) | | December 27, 2014(4) |
Statements of Operations Data | | | | | | | | | | | | | | | | | | | | | | |
Net sales | $ | 4,946.2 |
| | $ | 5,280.6 |
| | $ | 2,632.2 |
| | $ | 1,844.7 |
| | $ | 4,227.1 |
| | $ | 3,914.1 |
| $ | 4,837.4 |
| | $ | 4,731.7 |
| | $ | 4,946.2 |
| | $ | 5,280.6 |
| | $ | 2,632.2 |
| | $ | 1,844.7 |
|
Cost of sales | 2,966.7 |
| | 3,228.8 |
| | 1,553.3 |
| | 1,170.9 |
| | 2,582.9 |
| | 2,462.0 |
| 3,064.1 |
| | 2,900.2 |
| | 2,966.7 |
| | 3,228.8 |
| | 1,553.3 |
| | 1,170.9 |
|
Gross profit | 1,979.5 |
| | 2,051.8 |
| | 1,078.9 |
| | 673.8 |
| | 1,644.2 |
| | 1,452.1 |
| 1,773.3 |
| | 1,831.5 |
| | 1,979.5 |
| | 2,051.8 |
| | 1,078.9 |
| | 673.8 |
|
Operating expenses | 1,381.3 |
| | 4,051.5 |
| | 1,011.3 |
| | 384.1 |
| | 971.7 |
| | 880.7 |
| 1,568.5 |
| | 1,595.0 |
| | 1,381.3 |
| | 4,051.5 |
| | 1,011.3 |
| | 384.1 |
|
Operating income (loss) | $ | 598.2 |
| | $ | (1,999.7 | ) | | $ | 67.6 |
| | $ | 289.7 |
| | $ | 672.5 |
| | $ | 571.4 |
| $ | 204.8 |
| | $ | 236.5 |
| | $ | 598.2 |
| | $ | (1,999.7 | ) | | $ | 67.6 |
| | $ | 289.7 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 180.6 |
| | $ | 136.1 |
| | $ | 232.8 |
| $ | 146.1 |
| | $ | 131.0 |
| | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 180.6 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Diluted earnings from continuing operations per share | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 1.34 |
| | $ | 0.97 |
| | $ | 2.01 |
| |
Diluted earnings (loss) from continuing operations per share | | $ | 1.07 |
| | $ | 0.95 |
| | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 1.34 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Dividends declared per share | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.25 |
| | $ | 0.21 |
| | $ | 0.46 |
| | $ | 0.39 |
| $ | 0.82 |
| | $ | 0.76 |
| | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.25 |
| | $ | 0.21 |
|
| |
(1) | Includes the results of operations for assets acquired from Ranir Global Holdings, LLC for the six months ended December 31, 2019. |
| |
(2) | Includes the results of operations for assets acquired from Barr Laboratories, Inc. and assets acquired from Matawan Pharmaceuticals, LLC for the five months and eleven months and one week ended December 31, 2016, respectively. |
| |
(2) (3) | Includes the results of operations of Naturwohl and the GSK, ScarAway®, and Entocort® asset acquisitions for the two and a half months, three months, three months, and two weeks ended December 31, 2015, respectively. |
| |
(3) (4) | Includes the results of operations for assets acquired from Lumara Health, Inc. for the two months ended December 27, 2014. |
| |
(4)
| Includes the results of operations for assets acquired from Lumara Health, Inc. and the results of operations of Omega Pharma Invest N.V. and Gelcaps Exportadora de Mexico, S.A. de C.V. for the eight, three, and two months ended June 27, 2015, respectively. |
| |
(5)
| Includes the results of operations for Elan Corporation, plc and results of operations for assets acquired from Fera Pharmaceuticals, LLC (Methazolomide) and Aspen Global Inc. for the six, five and four months ended June 28, 2014, respectively. |
| | (in millions) | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 27, 2014 | | June 27, 2015 | | June 28, 2014 | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 27, 2014 |
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 678.7 |
| | $ | 622.3 |
| | $ | 417.8 |
| | $ | 3,596.1 |
| | $ | 785.6 |
| | $ | 799.5 |
| $ | 354.3 |
| | $ | 551.1 |
| | $ | 678.7 |
| | $ | 622.3 |
| | $ | 417.8 |
| | $ | 3,596.1 |
|
Total assets | 11,628.8 |
| | 13,870.1 |
| | $ | 19,349.6 |
| | 16,508.4 |
| | $ | 19,591.9 |
| | $ | 13,879.1 |
| $ | 11,301.4 |
| | $ | 10,983.4 |
| | $ | 11,628.8 |
| | $ | 13,870.1 |
| | $ | 19,349.6 |
| | $ | 16,508.4 |
|
Long-term debt, less current portion | 3,270.8 |
| | 5,224.5 |
| | 4,971.6 |
| | 4,439.4 |
| | 5,246.9 |
| | 5,246.9 |
| $ | 3,365.8 |
| | $ | 3,052.2 |
| | $ | 3,270.8 |
| | $ | 5,224.5 |
| | $ | 4,971.6 |
| | $ | 4,439.4 |
|
| |
ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management's Discussion and Analysis ("MD&A") is intended to provide readers with an understanding of our financial condition, results of operations, and cash flows by focusing on changes in certain key measures from year to year. This MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying Notes found in Item 8 of this report. See also "Cautionary Note Regarding Forward-Looking Statements."
Perrigo Company plc - Item 7
Executive Overview
EXECUTIVE OVERVIEW
Perrigo Company plc was incorporated under the laws of Ireland on June 28, 2013 and became the successor registrant of Perrigo Company, a Michigan corporation, on December 18, 2013 in connection with the acquisition of Elan Corporation, plc ("Elan"). Unless the context requires otherwise, the terms "Perrigo," the "Company," "we," "our," "us," and similar pronouns used herein refer to Perrigo Company plc, its subsidiaries, and all predecessors of Perrigo Company plc and its subsidiaries.
We are a leading global healthcare company, delivering valuededicated to our customers and consumersmaking lives better by providing bringing “Quality, Affordable Healthcare Products®. Founded in 1887 as a packager of home remedies, we have built a unique business modelSelf-Care Products™” that is best described as the convergence of a fast-moving consumer goods company, a high-quality pharmaceutical manufacturing organization and a world-class supply chain network. We believe weconsumers trust everywhere they are one of the world's largest manufacturers of over-the-counter (“OTC”) healthcare products and suppliers of infant formulas for the store brand market.sold. We are a leading provider of branded OTC products throughout Europe,over-the-counter ("OTC") health and wellness solutions that enhance individual well-being by empowering consumers to proactively prevent or treat conditions that can be self-managed. We are also a leading producer of generic prescription pharmaceutical topical products such as creams, lotions, gels, and gels,nasal sprays.
Our vision is designed to support our shifting focus to our consumer branded and store brand portfolio and our global reach and the opportunities for growth we see ahead of us, while remaining loyal to our heritage. Our vision represents an evolution from healthcare to self-care, which takes advantage of a massive global trend and opens up a large number of adjacent growth opportunities. We define self-care as well as nasal spraysnot just treating disease or helping individuals feel better after taking a product, but also maintaining and injection ("extended topical") prescription drugs. We are headquarteredenhancing their overall health and wellness. In 2019, Perrigo’s management and Board of Directors launched a three-year strategy to transform the Company into a consumer self-care leader, consistent with our vision. Significant progress was made in Ireland,the first year of our transformation journey towards achieving the major components of management’s transformation strategy, which consists of: reconfiguring the portfolio, delivering on base plans, creating repeatable platforms for growth, driving organizational effectiveness and sell our products primarilycapabilities, increasing productivity, allocating capital and delivering consistent and sustainable results in North America and Europe, as well as in other markets, including Australia, Israel and China.line with consumer-packaged goods peers.
Our fiscal year previously consisted of a 52- or 53-week year ending on or around June 30 of each year with each quarter ending on the Saturday closest to each calendar quarter end. Beginning on January 1, 2016, we changed our fiscal year to beginbegins on January 1 and endends on December 31 of each year. As a result of our change in yearWe end this report on Form 10-K discloses the results of our operations for:
The twelve-month period from January 1, 2017 through December 31, 2017;
The twelve-month period from January 1, 2016 through December 31, 2016;
The twelve-month period from January 1, 2015 through December 31, 2015;
The six-month period from June 28, 2015 through December 31, 2015; and
The six-month period from June 29, 2014 through December 27, 2014.
Calendar-year data for 2015 was derived from our audited results for the six-month period ended December 31, 2015 and unaudited results for the fiscal quarters ended March 28, 2015 and June 27, 2015. We cut off our quarterly accounting periods on the Saturday closest to the end of the calendar quarter, with the fourth quarter ending on December 31 of each year.
Our Segments
During the three months ended March 30, 2019, we changed the composition of our operating and reporting segments. We moved our pharmaceuticals and diagnostic businesses in Israel from the Consumer Self-Care International segment to the Prescription Pharmaceuticals segment and we made certain adjustments to our allocations between segments. These changes were made to reflect changes in the way in which management makes operating decisions, allocates resources, and manages the growth and profitability of the Company.
Our new reporting and operating segments are as follows:
| |
• | Consumer Self-Care Americas ("CSCA"), formerly Consumer Healthcare Americas, comprises our consumer self-care business (OTC, contract manufacturing, infant formula, and oral self-care categories and our divested animal health category) in the U.S., Mexico and Canada. |
| |
• | Consumer Self-Care International ("CSCI"),formerly Consumer Healthcare International, comprises our branded consumer self-care business primarily in Europe and Australia, our consumer-focused business in the United Kingdom and parts of Asia, and our liquid licensed products business in the United Kingdom. |
| |
• | Prescription Pharmaceuticals ("RX") comprises our prescription pharmaceuticals business in the U.S. and our pharmaceuticals and diagnostic businesses in Israel, which were previously in our CSCI segment. |
Consumer Healthcare Americas ("CHCA"), comprises our U.S., Mexico and Canada consumer healthcare business (OTC, contract, infant formula and animal health categories).
Consumer Healthcare International("CHCI"),comprises our branded consumer healthcare business primarily in Europe and our consumer focused businesses in the U.K., Australia, and Israel. This segment also includes our U.K. liquid licensed products business.
Prescription Pharmaceuticals("RX"),comprises our U.S. Prescription Pharmaceuticals business.
We also had two legacy operating segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and Active Pharmaceuticals business ("API") businesses, respectively, which we divested (refer to Item 8. Note 2 and Note 6). Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segment were moved to unallocated expenses. Our segments reflect the way in which our management makes operating decisions, allocates resources and manages the growth and profitability of the Company.
Perrigo Company plc - Item 7
Executive Overview
Strategy
Our strategy is to deliver make lives better by bringing "Quality, Affordable Healthcare ProductsSelf-Care Products™"® that consumers trust everywhere they are sold. We accomplish this by leveraging our global infrastructure to expand our product offerings, thereby providing new innovative products and product line extensions to existing consumers and servicing new healthcare consumers through entry into adjacent product categories or new markets.geographies. We accomplish this strategy by investing in and continually improving all aspects of our five strategic pillars:
High quality;
Superior customer service;
Leading innovation;
Best cost; and
Empowered people.people,
while remaining true to our three core values, Integrity - we do what is right; Respect - we demonstrate the value we hold for one another; and Responsibility - we hold ourselves accountable for our actions.
We utilize shared services and Research and Development ("R&D") centers of excellence in order to help ensure consistency in our processes around the world, and to maintain focus on our five strategic pillars.
We have grown rapidly in recent years through a combination of organic growth and targeted acquisitions. We continually reinvest in our R&D pipeline and work with partners as necessary to strive to be first-to-market with new products. Our organic growth has been and will continue to be driven by successful new product launches in the CHCA, CHCI,all our segments and RX segments.expansion in new channels like e-commerce. Over time, we expect to continue to grow inorganically through expansion into adjacent products, product categories, and channels, as well as potentially through entry into new geographic markets. We evaluate potential acquisition targets using a return on invested capital ("ROIC") metric.an internally developed 12-point scale, that is weighted towards accretive growth and correlated with shareholder value.
Competitive Advantage
We believe our consumer facingOur consumer-facing business model is best-in-class in that it combines the unique competencies of a fast-moving consumer goods company and a pharmaceutical manufacturing company with the supply chain breadth necessary to support customers in the markets we serve. These durable business model competencies align with our five strategic pillars and provide us a competitive advantage in the marketplace. We fully integrate quality in our operational systems across all products. Our ability to manage our supply chain complexity across multiple dosage forms, formulations, and stock-keeping units, as well as acquisitions, integration,integrations, and hundreds of global partners provides value to our customers. Product development capacity and life cycle management are at the core of our operational investments. Globally we have 2822manufacturing plants that are all in good regulatory compliance standing and have systems and structures in place to guide our continued success. Our leadership team is fully engaged in aligning all our metrics and objectives around sustainable compliance with industry associations and regulatory agencies.
Among other things, we believe the following give us a competitive advantage and provide value to our customers:
Leadership in first-to-market product development and product life cycle management;
Turn-key regulatory and promotional capabilities;
Management of supply chain complexity and utilizing economies of scale;
Quality and cost effectiveness throughout the supply chain creating a sustainable, low-cost network;
Deep understanding of consumer needs and customer strategies;
Industry leading e-commerce support; and
Expansive pan-European commercial infrastructure, brand-building capabilities, and a diverse product portfolio.
Perrigo Company plc - Item 7
Executive Overview
Product Categories
As we continue to transform to a consumer-focused, self-care company, we re-aligned our product categories in our CSCA and CSCI segments as of December 31, 2019. The re-alignment standardizes our categories and product level detail to provide consistency across segments. This transformative step will optimize the way in which management reports and evaluates our business (refer to Item 1. Business - Our Segments and Item 8. Note 2).
Recent Highlights
Year Ended December 31, 20172019
We previously announced a plan to separate our RX business, which, when completed, will enable us to focus on expanding our consumer-focused businesses. In 2019, we continued preparations related to our planned separation, which may include a possible sale, spin-off, merger or other form of separation. While we remain committed to transforming to a consumer-focused business, we have not committed to a specific date or form for the separation. In connection with the proposed separation, we have incurred significant preparation costs and will continue to incur costs that when completed will be in the range of $45.0 million to $80.0 million, excluding restructuring expenses and transaction costs, depending on the final timing and structure of the transaction.
On July 8, 2019, we completed the sale of our animal health business to PetIQ for cash consideration of $182.5 million, which resulted in a pre-tax gain of $71.7 million recorded in Other (income) expense, net on the Consolidated Statements of Operations.
On July 1, 2019, we acquired 100% of the outstanding equity interest in Ranir Global Holdings, LLC ("Ranir"), a privately-held leading global supplier of private label and branded oral self-care products. After post-closing adjustments, total cash consideration paid was $747.7 million, net of $11.5 million cash acquired. This transaction advances our transformation to a consumer-focused, self-care company while enhancing our position as a global leader in consumer self-care solutions.
Year Ended December 31, 2018
| |
• | On March 27, 2017, we completedDuring the sale ofyear ended December 31, 2018, our Tysabri®divested financial asset effective January 1, 2017, to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments ifTysabri® met the royalties on2018 global net sales of Tysabri® that arethreshold resulting in a $170.1 million gain. We received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we derecognized the Tysabri® financial asset and recorded a $17.1$250.0 million gain (refer to Item 8. Note 6).royalty payment on February 22, 2019. |
| |
• | On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited for $22.2 million, inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 8. Note 2). |
| |
• | On August 25, 2017, we completed the sale of our Russian business to Alvogen Pharma LLC. for €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment. The sale did not have a material impact on our operations (refer to Item 8. Note 2). |
| |
• | On November 21, 2017, we completed the sale of our Israel API business to SK Capital, for a sale price of $110.0 million, which resulted in an immaterial gain recorded in our Other segment in Other expense (Income), net on the Consolidated Statements of Operations (refer to Item 8. Note 2 and Note 6). |
| |
• | We repurchased $191.5 million worth of shares as part of our authorized share repurchase plan (refer to Item 8. Note 11). |
| |
• | We executed initiatives related to our cost optimization strategy that was announced on February 21, 2017. Restructuring charges totaled $61.0 million (refer to Item 8. Note 18). |
Year EndedDuring the year ended December 31, 2016
Consistent with previously announced actions,2018, we added a numberrepurchased $400.0 million worth of positions and processes to our Dublin headquarters across a range of corporate functions, including supply chain/global operations, procurement, enterprise risk management, and corporate finance, leveraging the strengthshares as part of our global platform.authorized share repurchase plan.
| |
• | We repaid $500.0 million outstanding under our 1.300% Senior Notes due 2016 ("1.300% 2016 Notes") on September 29, 2016 (refer to Item 8. Note 10). |
| |
• | On August 5, 2016, we completed the sale of our U.S. Vitamins, Minerals, and Supplements ("VMS") business to International Vitamins Corporation (refer to Item 8. Note 2). |
Six Months Ended December 31, 2015
On November 13, 2015, our shareholders rejected an unsolicited tender offer from Mylan N.V. ("Mylan"). During the six months ended December 31, 2015, the total cost to effectively defend against Mylan was $86.9 million, which was recorded in Administration expense.
| |
• | We expanded our product offerings through targeted acquisitions including (refer to Item 8. Note 2): |
| |
• | The announced acquisition of a portfolio of generic dosage forms and strengths of Retin-A® (tretinoin), a topical prescription acne treatment, from Matawan Pharmaceuticals, LLC, which closed in January 2016 and expanded our "prescription only" ("Rx") portfolio.
|
| |
• | The acquisition of Crohn's disease treatment Entocort® (budesonide) capsules and its authorized generic (for sale within the U.S.), from AstraZeneca plc, which expanded our Rx portfolio.
|
Perrigo Company plc - Item 7
Executive OverviewConsolidated
| |
• | The acquisition of Naturwohl Pharma GmbH ("Naturwohl"), a nutritional business known for its leading German dietary supplement brand, Yokebe®, and the acquisition of a portfolio of well-established OTC brands, such as Niquitin® and Coldrex®,from GlaxoSmithKline Consumer Healthcare (“GSK”). Both of these acquisitions built upon the global platform we established through the Omega Pharma Invest N.V. ("Omega") acquisition, leveraging our European market share and expanding our product offerings.
|
| |
• | The ScarAway® brand portfolio acquisition, which served as our entry into the branded OTC business in the U.S.
|
| |
• | We repurchased $500.0 million worth of shares as part of our authorized share repurchase plan (refer to Item 8. Note 11). |
| |
• | We executed initiatives designed to increase operational efficiency and improve our return on invested capital by globalizing our supply chain through global shared service arrangements, streamlining our organizational structure, and disposing of certain assets. During the six months ended December 31, 2015, restructuring charges totaled $26.9 million (refer to Item 8. Note 18). |
RESULTS OF OPERATIONS
CONSOLIDATED
Consolidated Financial Results
|
| | | | | | | | | | | |
| Year Ended |
(in millions) | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
Net sales | $ | 4,837.4 |
| | $ | 4,731.7 |
| | $ | 4,946.2 |
|
Gross profit | $ | 1,773.3 |
| | $ | 1,831.5 |
| | $ | 1,979.5 |
|
Gross profit % | 36.7 | % | | 38.7 | % | | 40.0 | % |
Operating income | $ | 204.8 |
| | $ | 236.5 |
| | $ | 598.2 |
|
Operating income % | 4.2 | % | | 5.0 | % | | 12.1 | % |
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
Net sales | $ | 1,844.7 |
| | $ | 2,632.2 |
| | $ | 5,014.7 |
| | $ | 5,280.6 |
| | $ | 4,946.2 |
|
Gross profit | $ | 673.8 |
| | $ | 1,078.9 |
| | $ | 2,049.4 |
| | $ | 2,051.8 |
| | $ | 1,979.5 |
|
Gross profit % | 36.5 | % | | 41.0 | % | | 40.9 | % | | 38.9 | % | | 40.0 | % |
Operating expenses | $ | 384.1 |
| | $ | 1,011.3 |
| | $ | 1,599.0 |
| | $ | 4,051.5 |
| | $ | 1,381.3 |
|
Operating expenses % | 20.8 | % | | 38.4 | % | | 31.9 | % | | 76.7 | % | | 27.9 | % |
Operating income (loss) | $ | 289.7 |
| | $ | 67.6 |
| | $ | 450.4 |
| | $ | (1,999.7 | ) | | $ | 598.2 |
|
Operating income (loss) % | 15.7 | % | | 2.6 | % | | 9.0 | % | | (37.9 | )% | | 12.1 | % |
Change in financial assets | $ | (46.9 | ) | | $ | (57.3 | ) | | $ | (88.8 | ) | | $ | 2,608.2 |
| | $ | 24.9 |
|
Interest and other, net | $ | 117.0 |
| | $ | 115.1 |
| | $ | 478.2 |
| | $ | 239.3 |
| | $ | 158.0 |
|
Loss on extinguishment of debt | $ | 9.6 |
| | $ | 0.9 |
| | $ | 1.8 |
| | $ | 1.1 |
| | $ | 135.2 |
|
Income tax expense (benefit) | $ | 29.4 |
| | $ | (33.6 | ) | | $ | 61.1 |
| | $ | (835.5 | ) | | $ | 160.5 |
|
Net income (loss) | $ | 180.6 |
| | $ | 42.5 |
| | $ | (1.9 | ) | | $ | (4,012.8 | ) | | $ | 119.6 |
|
Perrigo Company plc - Item 7
Consolidated
| |
* | Total net sales by geography is derived from the location of the entity that sells to a third party. For geographic information |
Year Ended December 31, 2019 vs. December 31, 2018
Net sales increased $105.7 million, or 2%, due to:
$279.4 million, or a 6%, net increase due to new product sales of $230.5 million, an increase of $151.4 million due to our acquisition of Ranir, and an overall increase in demand for existing products, partially offset by normal levels of competition-driven pricing pressure primarily in our RX segment and a $59.0 million decrease due to discontinued products; partially offset by
$173.7 million decrease due to:
| |
◦ | $86.4 million decrease due primarily to unfavorable Euro foreign currency translation; |
| |
◦ | $50.2 million decrease due to our divested animal health business; |
| |
◦ | $27.9 million decrease due to our exited infant foods business; and |
| |
◦ | $9.2 million decrease due to the retail market withdrawal of Ranitidine products. |
Operating income decreased $31.7 million, or 13%, due to:
| |
• | $58.2 milliondecrease in gross profit, or a 200 basis point decrease in gross profit as a percentage of net sales, due primarily to normal levels of competition-driven pricing pressure in our RX segment, the retail market withdrawal of Ranitidine products and unfavorable product mix; partially offset by |
Perrigo Company plc - Item 7
Consolidated
$26.5 million decrease in operating expenses due primarily to:
| |
◦ | $39.9 million decrease in impairment charges due primarily to the absence of $221.9 million in impairment charges related to animal health goodwill and intangible assets and certain in-process research and development ("IPR&D") taken in the prior year period; partially offset by $184.5 million in current year impairments primarily for our RX U.S. reporting unit goodwill and certain definite-lived intangible assets in our RX and CSCI segments; and |
| |
◦ | $31.1 million decrease in R&D expenses primarily related to the absence of a $50.0 million upfront license fee payment to enter into a license agreement with Merck Sharp & Dohme Corp in the prior year period, partially offset by current year innovation investments and pre-commercialization R&D costs for generic albuterol sulfate inhalation aerosol, the generic version of ProAir® HFA; partially offset by |
| |
◦ | $17.8 million increase due to the absence of an insurance recovery received in the prior year; and |
| |
◦ | $20.6 million increase in selling and administrative expenses due primarily to restored employee incentive compensation, increased acquisition and integration-related charges due to the Ranir acquisition; partially offset by favorable Euro foreign currency translation. |
Year Ended December 31, 2018 vs. December 31, 2017
Net sales decreased $214.5 million, or 4%, due primarily to:
$159.3 million, or a 3%, net decrease due primarily to normal levels of competition-driven pricing pressure primarily in our RX segment, discontinued products of $66.4 million, and a decrease in volume in most segments, partially offset by $169.8 million increase due to new product sales; and
$55.2 million decrease due to:
| |
◦ | $88.7 million decrease due to our divested Russian business and Israel API business; partially offset by |
| |
◦ | $33.5 million increase due primarily to favorable Euro foreign currency translation. |
Operating income decreased $361.7 million, or 60%, due primarily to:
| |
• | $148.0 milliondecrease in gross profit, or a 130 basis point decrease in gross profit as a percentage of net sales, due primarily to pricing pressure in our CSCA and RX segments, unfavorable product mix, and operating variances and increased input costs; partially offset by favorable pricing and benefits from continued insourcing initiatives in our CSCI segment; and |
$213.7 million increase in operating expenses due primarily to:
| |
◦ | $176.9 million increase in impairment charges related primarily to animal health goodwill and intangible assets in 2018; partially offset by 2017 impairment charges related to certain definite-lived intangible assets and IPR&D; |
| |
◦ | $50.9 million increase in R&D expense primarily related to a $50.0 million upfront license fee payment to enter into a license agreement with Merck Sharp & Dohme Corp; |
| |
◦ | $38.0 million increase due to the absence of a gain for the year ended December 31, 2016, six months ended December 31, 2015,sale of certain ANDAs recognized in 2017, and the year ended June 27, 2015, referabsence of a gain related to Item 8. Note 19.contingent consideration adjustments; partially offset by |
| |
◦ | $32.4 million decrease in restructuring expense due primarily to the cost reduction initiatives and strategic organizational enhancements taken in 2017; and |
| |
◦ | $17.8 million decrease due primarily to an insurance recovery. |
DetailsRecent Developments
Internal Revenue Service Notices of Proposed Adjustments
On August 22, 2019, we received a draft Notice of Proposed Adjustment ("NOPA") from the IRS with respect to our fiscal tax years ended June 28, 2014 and June 27, 2015, relating to the deductibility of interest on $7.5 billion in
Perrigo Company plc - Item 7
Consolidated
debts owed to Perrigo Company plc by Perrigo Company, a Michigan corporation and wholly-owned indirect subsidiary of Perrigo Company, plc. The debts were incurred in connection with the Elan merger transaction in 2013. The draft NOPA would cap the interest rate on the debts for U.S. federal tax purposes at 130.0% of the Applicable Federal Rate (a blended rate reduction of 4.0% per annum from the rates agreed to by the parties), on the stated ground that the loans were not negotiated on an arms’-length basis. As a result of the proposed interest rate reduction, the draft NOPA proposes a reduction in gross interest expense of approximately $480.0 million for fiscal years 2014 and 2015. If the IRS were to prevail in its proposed adjustment, we estimate an increase in tax expense for such fiscal years of approximately $170.0 million, excluding interest and penalties. In addition, we would expect the IRS to seek similar adjustments for the period from June 28, 2015 through December 31, 2019. If those further adjustments were sustained, based on our preliminary calculations and subject to further analysis, our current best estimate is that the additional tax expense would not exceed $200.0 million, excluding interest and penalties, for the period June 28, 2015 through December 31, 2019. We do not expect any similar adjustments beyond December 31, 2019 as proposed regulations, issued under section 267A of the Internal Revenue Code, would eliminate the deductibility of interest on this debt. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies. No payment of any amount related to the proposed adjustments is required to be made, if at all, until all applicable proceedings have been completed.
Following receipt of the draft NOPA, Perrigo provided the IRS with a detailed written response on September 20, 2019. That submission included an analysis by external advisors that supported the original interest rates as being consistent with arms'-length rates for comparable debt and explained why the exam team's analyses and conclusions were both factually and legally misguided. Based on discussions with the IRS, we had believed that the IRS staff would take our financial resultssubmission into account and meet with us to discuss whether this issue could be resolved at the examination level. However, in the weeks following such discussions, IRS staff advised that they would not respond in detail to our September submission or negotiate the interest rate issue prior to issuing a final NOPA consistent with the draft NOPA. Accordingly, we currently expect that we will receive a final NOPA regarding this matter that proposes substantially the same adjustments described in the draft NOPA. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15).
On April 26, 2019, we received a revised NOPA from the IRS regarding transfer pricing positions related to the IRS audit of Athena for the years ended December 31, 2017,2011, December 31, 2016,2012 and December 31, 2015,2013. The NOPA carries forward the six monthsIRS's theory from its 2017 draft NOPA that when Elan took over the future funding of Athena’s in-process research and development after acquiring Athena in 1996, Elan should have paid a substantially higher royalty rate for the right to exploit Athena’s intellectual property, rather than rates based on transfer pricing documentation prepared by Elan's external tax advisors. The NOPA proposes a payment of $843.0 million, which represents additional tax and a 40.0% penalty. This amount excludes consideration of offsetting tax attributes and potentially material interest. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including potentially those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. No payment of the additional amounts is required until the matter is resolved administratively, judicially, or through treaty negotiation. While we believe our position to be correct, there can be no assurance of an ultimate favorable outcome, and if the matter is resolved unfavorably it could have a material adverse impact on our liquidity and capital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 15).
Irish Tax Appeals Commission Notice of Amended Assessment
On October 30, 2018, we received an audit finding letter from the Irish Office of the Revenue Commissioners (“Irish Revenue”) for the years ended December 31, 20152012 and December 27, 2014, and the years ended June 27, 2015 and June 28, 2014 are described below by reporting segment and line item. Refer31, 2013. The audit finding letter relates to the "Unallocated Expenses," "Interest, Othertax treatment of the 2013 sale of the Tysabri® intellectual property and Change in financialother assets (Consolidated)," and "Income Taxes (Consolidated)" sections below for discussions related to Tysabri® to Biogen Idec from Elan Pharma. The consideration paid by Biogen to Elan Pharma took the form of an upfront payment and future contingent royalty payments. Irish Revenue issued a Notice of Amended Assessment ("NoA") on November 29, 2018, which assesses an Irish corporation tax liability against Elan Pharma in the amount of €1,636 million, not including interest or any applicable penalties.
We disagree with this assessment and believe that the NoA is without merit and incorrect as a matter of law. We filed an appeal of the NoA on December 27, 2018 and will pursue all available administrative and judicial avenues as may be necessary or appropriate. In connection with that, Elan Pharma was granted leave by the Irish High Court on February 25, 2019 to seek judicial review of the issuance of the NoA by Irish Revenue. The judicial review filing is based
Perrigo Company plc - Item 7
Consolidated
on our expenses.
Restructuring
On February 21, 2017,belief that Elan Pharma's legitimate expectations as a taxpayer have been breached, not on the merits of the NoA itself. The High Court has scheduled a hearing in this judicial review proceeding in April 2020, and we approvedwould expect a workforce reduction plan as partdecision in this matter in the second half of 2020. If we are ultimately successful in the judicial review proceedings, the NoA will be invalidated and Irish Revenue will not be able to re-issue the NoA. The proceedings before the Tax Appeals Commission have been stayed until a larger cost optimization strategy acrossdecision on the Company, which was completed duringjudicial review application has been made. If for any reason the year. Our plan wasjudicial review proceedings are ultimately unsuccessful in establishing that Irish Revenue's issuance of the NoA breaches our legitimate expectations, Elan Pharma will reactivate its appeal to reducechallenge the merits of the NoA before the Tax Appeals Commission. While we believe our global workforce by approximately 750 employees, which included some actions already takenposition to be correct, there can be no assurance of an ultimate favorable outcome, and 235 employees who had elected to participate inif the matter is resolved unfavorably it could have a voluntary early retirement program. This represented a reduction of approximately 14% ofmaterial adverse impact on our global non-production workforce. The changes to our workforce varied by country, based on legal requirementsliquidity and required consultations with works councils and other employee representatives, as appropriate. During the year ended December 31, 2017, we recognized $61.0 million of restructuring expensescapital resources (refer to Item 1A. Risk Factors - Tax Related Risks and Item 8. Note 1815). In addition, during the year ended December 31, 2017, we executed a supply chain reorganization which continues to generate savings for both our North American and International segments.
Impairments
Throughout the years ended December 31, 20172019, December 31, 2018, and December 31, 2016,2017, we identified impairment indicators for various assets across our different segments, and therefore, we performed impairment testing. Below is a summary of the impairment charges recorded by segment (in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 |
| | Definite-Lived Intangible Assets | | Assets Held-For-Sale | | IPR&D | | Fixed Assets | | Total |
CHCA(1) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4.5 |
| | $ | 4.5 |
|
CHCI(2) | | — |
| | 3.7 |
| | 1.1 |
| | — |
| | 4.8 |
|
RX(3) | | 19.7 |
| | — |
| | 11.6 |
| | 3.6 |
| | 34.9 |
|
Other(4) | | — |
| | 3.3 |
| | — |
| | — |
| | 3.3 |
|
| | $ | 19.7 |
| | $ | 7.0 |
| | $ | 12.7 |
| | $ | 8.1 |
| | $ | 47.5 |
|
|
| | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2019 |
| CSCA | | CSCI(1) | | RX(2) | | Total |
Goodwill | $ | — |
| | $ | — |
| | $ | 109.2 |
| | $ | 109.2 |
|
Definite-lived intangible assets | — |
| | 9.7 |
| | 59.8 |
| | 69.5 |
|
IPR&D | 4.1 |
| | 0.1 |
| | 1.6 |
| | 5.8 |
|
| $ | 4.1 |
| | $ | 9.8 |
| | $ | 170.6 |
| | $ | 184.5 |
|
(1) Relates primarily to an intangible asset for certain pain relief products that we license from a third party.
(2) Relates primarily to our RX U.S. reporting unit goodwill, and definite-lived intangible assets for our generic clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®), our Evamist® branded product, and a generic product.
|
| | | | | | | | | | | |
| Year Ended |
| December 31, 2018 |
| CSCA(1) | | CSCI | | Total |
Goodwill | $ | 136.7 |
| | $ | — |
| | $ | 136.7 |
|
Indefinite-lived intangible assets | 27.7 |
| | — |
| | 27.7 |
|
Definite-lived intangible assets | 48.9 |
| | 0.7 |
| | 49.6 |
|
Assets held-for-sale | 0.6 |
| | 1.1 |
| | 1.7 |
|
IPR&D | 8.7 |
| | — |
| | 8.7 |
|
| $ | 222.6 |
| | $ | 1.8 |
| | $ | 224.4 |
|
(1) Relates primarily to animal health and certain IPR&D.
Perrigo Company plc - Item 7
Consolidated
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, 2017 |
| CSCA(1) | | CSCI(2) | | RX(3) | | Other(4) | | Total |
Definite-lived intangible assets | $ | — |
| | $ | — |
| | $ | 19.7 |
| | $ | — |
| | $ | 19.7 |
|
Assets held-for-sale | — |
| | 3.7 |
| | — |
| | 3.3 |
| | 7.0 |
|
IPR&D | — |
| | 1.1 |
| | 11.6 |
| | — |
| | 12.7 |
|
Property, plant, and equipment | 4.5 |
| | — |
| | 3.6 |
| | — |
| | 8.1 |
|
| $ | 4.5 |
| | $ | 4.8 |
| | $ | 34.9 |
| | $ | 3.3 |
| | $ | 47.5 |
|
(1) Relates to certain idle property, plant and equipment.
(2) Relates primarily to our Russian business, assets held-for-sale, which werewas sold August 25, 2017 (refer to Item 8. Note 2).2017. Perrigo Company plc - Item 7
Consolidated
(3) Relates primarily to intangible assets acquired through the Lumara Health, Inc. acquisition and In-Process Research and Development ("IPR&D")&D assets acquired in conjunction with certain Development-Stage Rx Products(refer to Item 8. Note 3).Products. (4) Relates to our Israel API assets held-for-sale,business, which werewas sold November 21, 2017 (refer to Item 8. Note 2).2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2016 |
| | Goodwill | | Indefinite-Lived Intangible Assets | | Definite-Lived Intangible Assets | | Assets Held-For-Sale | | IPR&D | | Fixed Assets | | Total |
CHCA(1) | | $ | 24.5 |
| | $ | 0.4 |
| | $ | — |
| | $ | 9.9 |
| | $ | — |
| | $ | 3.5 |
| | $ | 38.3 |
|
CHCI(2) | | 868.4 |
| | 849.1 |
| | 321.4 |
| | — |
| | 3.5 |
| | — |
| | 2,042.4 |
|
RX(3) | | — |
| | — |
| | 342.2 |
| | — |
| | — |
| | 0.2 |
| | 342.4 |
|
Specialty Sciences(4) | | 199.6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 199.6 |
|
Other(5) | | — |
| | — |
| | 2.0 |
| | 6.3 |
| | — |
| | — |
| | 8.3 |
|
| | $ | 1,092.5 |
| | $ | 849.5 |
| | $ | 665.6 |
| | $ | 16.2 |
| | $ | 3.5 |
| | $ | 3.7 |
| | $ | 2,631.0 |
|
(1) Relates primarily to goodwill acquired through the acquisition of Sergeant’s Pet Care Products, Inc. and Velcera Inc. (refer to Item 8. Note 3),as well as U.S. VMS assets held for sale, which were subsequently sold on August 5, 2016 (refer to Item 8. Note 2).(2) Relates to certain intangible assets and goodwill acquired in conjunction with the Omega acquisition as well as trademarks originally acquired through the acquisition of Aspen Global Inc. (refer to Item 8. Note 3).(3) Relates primarily to our intangible assets acquired in conjunction with the Entocort® acquisition (refer to Item 8. Note 3).(4) Relates to goodwill from our Elan acquisition (refer to Item 8. Note 3).(5)Relates primarily to our India API assets held-for-sale, which were sold April 6, 2017 (refer to Item 8. Note 2 and 9).
CONSUMER HEALTHCARESELF-CARE AMERICAS
Recent Trends and Developments
We continueOn February 20, 2020, we entered into a definitive agreement to experience a reduction in pricing expectations within our CHCA segment, primarilyacquire the oral care assets of High Ridge Brands for cash of $113.0 million. The transaction is expected to close in the cough/cold, animal health,first quarter of 2020 subject to bankruptcy court approval in connection with High Ridge Brands’ Chapter 11 cases, as well as other customary closing conditions. This transaction, in combination with our existing children’s oral self-care portfolio, provides a new platform for disruptive product innovation in the form of exclusive store and analgesics categories due to various factors, including focus from customers to capture supply chain productivity savings and competition in specific product categories. We expect this pricing environment to continue to impact our CHCA segment for the foreseeable future.
value brand programs that challenge current national brand oral care offerings.
| |
• | We completedOn January 3, 2020, we acquired Steripod®, a leading toothbrush accessory brand and innovator in the saletoothbrush protector market, from Bonfit America Inc. The acquisition, which includes a portfolio of antibacterial toothbrush protectors, kids’ toothbrush protectors and tongue cleaners, complements our current portfolio of oral self-care products, and leverages our manufacturing and marketing platform. Operating results attributable to the animal health pet treats plant fixed assets on February 1, 2017 and received $7.7products will be included in our CSCA segment. Total consideration paid was $24.7 million, in proceeds (refersubject to Item 8. Note 2).customary post-closing adjustments |
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | |
| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 |
Net sales | $ | 2,507.1 |
| | $ | 2,429.9 |
|
Gross profit | $ | 825.2 |
| | $ | 817.8 |
|
Gross profit % | 32.9 | % | | 33.7 | % |
Operating income | $ | 399.8 |
| | $ | 445.0 |
|
Operating income % | 15.9 | % | | 18.3 | % |
Perrigo Company plc - Item 7
CHCA
Net sales decreased $77.2 million, or 3%, over the prior year due to:
| |
• | On November 29, 2019, we acquired the branded OTC rights to Prevacid®24HR from GlaxoSmithKline for $61.5 million. The absenceacquisition of $110.2 millionPrevacid®24HRexpands our U.S. OTC presence with a leading brand in sales attributable to the U.S. VMS business (refer to Item 8. Note 2);our digestive health product category. |
A net decrease in sales of existing products of $21.5 million due to pricing pressures and lower volumes in certain categories; and
Discontinued products of $14.0 million; partially offset by
| |
• | NewDuring the three months ended September 28, 2019, after regulatory bodies announced worldwide that Ranitidine may potentially contain N-nitrosodimethylamine ("NDMA"), a known environmental contaminant, we promptly began testing our externally-sourced Ranitidine API and Ranitidine-based products. On October 8, 2019, we halted shipments of the product based upon preliminary results. Based on the totality of data gathered, we made the decision to conduct a voluntary retail market withdrawal, which resulted in a decrease in net sales of $68.7$7.4 million related primarily to the launchesand a decrease in gross profit of fluticasone nasal spray (store brand equivalent to Flonase®), smoking cessation products and esomeprazole magnesium (store brand equivalent to Nexium® 24HR capsules).$15.5 million in our CSCA segment.
|
Operating income increased $45.2On July 8, 2019, we completed the sale of our animal health business to PetIQ for cash consideration of $182.5 million, or 11%,which resulted in a pre-tax gain of $71.7 million recorded in Other (income) expense, net on the Consolidated Statements of Operations.
On July 1, 2019, we acquired Ranir, a privately-held leading global supplier of private label and branded oral self-care products, for $747.7 million. This transaction advances our transformation to a consumer-focused, self-care company while enhancing our position as a result of:global leader in consumer self-care solutions.
A decrease of $7.4 million in gross profit due to:
Favorable product mix in certain categories; and
Positive contributions from supply chain efficiencies; more than offset by
| |
• | The absenceOn April 1, 2019, we purchased the ANDAs and other records and registrations of $17.6Budesonide Nasal Spray, a generic equivalent of Rhinocort Allergy® and Triamcinolone Nasal Spray, a generic equivalent of Nasacort Allergy®, from Barr Laboratories, Inc., a subsidiary of Teva Pharmaceuticals, for a total of $14.0 million in gross profit as a result of the sale of the U.S. VMS business (refer to Item 8. Note 2); andcash. |
Pricing pressuresPerrigo Company plc - Item 7
CSCA
Segment Financial Results
Year Ended December 31, 2019 vs. December 31, 2018
|
| | | | | | | |
| Year Ended |
(in millions) | December 31, 2019 | | December 31, 2018 |
Net sales | $ | 2,487.7 |
| | $ | 2,411.6 |
|
Gross profit | $ | 798.9 |
| | $ | 789.0 |
|
Gross profit % | 32.1 | % | | 32.7 | % |
Operating income | $ | 414.0 |
| | $ | 174.4 |
|
Operating income % | 16.6 | % | | 7.2 | % |
Net sales increased $76.1 million, or 3%, due primarily to:
$162.1 million, or 7%, net increase due primarily to an increase of $106.4 million due to our acquisition of Ranir, increased volume due to OTC category growth, market share gains from store brand competitors partly driven by $36.2 million of new product sales, growth in certain categoriesOTC e-commerce, and increased OTC store brand penetration versus national brand, partially offset by lower infant formula contract pack sales as discussed above.several branded customers made the strategic decision to exit the category, lower net sales in the Mexico business, and competition-driven pricing pressure; partially offset by
A$85.5 million decrease of $52.6 million in operating expenses due to:
| |
•◦ | The absence of a $36.7$50.2 million intangible asset and goodwill impairment charges relateddecrease due to the sale of the U.S. VMS business, held-for-sale assets associated with our divested animal health pet treats plant and our animal health business (refer to Item 8. Note 2, Note 3, and Note 9); |
Decreased selling and administrative expenses of $31.0 million due primarily to timing of promotions related to our animal health category and savings related to our cost reduction initiatives taken in the prior year;
Decreased R&D expenses of $8.2 million due to timing of clinical trials, reduced spending on infant formula clinical trials and lower costs related to our cost reduction initiatives; and
| |
• | A $4.1 million gain related to contingent consideration (refer to Item 8. Note 6); offset partially by business; |
| |
•◦ | Increased restructuring expenses$27.9 million decrease due to our exited foods business; and
|
| |
◦ | $7.4 million decrease due to the retail market withdrawal of $21.8 million related primarily to strategic organizational enhancements (refer to Item 8. Note 18); andRanitidine products. |
A $4.5
Operating income increased $239.6 million, impairment charge recorded on idle property, plant and equipment.or 137%, due primarily to:
Gross$9.9 million increase in gross profit due primarily to increased net sales as described above, but a 60 basis point decrease in gross profit as a percentage of net sales, was 0.8% higher due primarily to favorable product mix and supply chain efficiencies as discussed above.
Operating income as a percentagepricing pressures, the retail market withdrawal of net sales was 2.4% higher due primarily to favorable product mix as discussed above and decreased operating expenses.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | |
| Year Ended |
($ in millions) | December 31, 2015 | | December 31, 2016 |
Net sales | $ | 2,554.2 |
| | $ | 2,507.1 |
|
Gross profit | $ | 846.7 |
| | $ | 825.2 |
|
Gross profit % | 33.2 | % | | 32.9 | % |
Operating income | $ | 439.9 |
| | $ | 399.8 |
|
Operating income % | 17.2 | % | | 15.9 | % |
Perrigo Company plc - Item 7
CHCA
Net sales decreased $47.1 million, or 2%, over the prior year due to:
Discontinued products of $61.3 million related primarily to a label refresh within the infant formula category; and
A net $56.5 million decrease in existing product sales as a result of:
Strong sales in our infant nutrition, and smoking cessation categories; more than offset by
A milder cold and flu season in the first and second quarters of 2016, which led to weaker sales in the cough/cold and analgesics categories;
Pricing pressure, which impacted sales in the cough/cold, analgesics, and animal health categories in particular;
Lower sales in the antacids category; and
Timing of promotions in the second and third quarters of 2015 and a milder allergy season in the third quarter of 2016, which had a negative impact on year-over-year sales in the cough/cold category;
Lower year-over-year sales of $52.1 million attributable to the U.S. VMS business, which was sold in August 2016; and
Unfavorable foreign currency translation movement of $15.0 million; offset partially by
| |
• | New product sales of $117.4 million related primarily to the launches of fluticasone nasal spray (store brand equivalent to Flonase®), certain guaifenesin products (store brand equivalent to Mucinex®), several new infant formula and food products, and new animal health products; and
|
| |
• | Incremental net sales of $20.3 million related primarily to the Gelcaps and ScarAway® acquisitions.
|
Operating income decreased $40.1 million, or 9%, as a result of:
A decrease of $21.5 million in gross profit due to:
Pricing pressure as noted above; and
| |
• | Increased intangible asset amortization expense associated primarily with the Gelcaps and ScarAway® acquisitions; offset partially by
|
Margin contributions from newRanitidine products, and strong performance in the infant nutrition and smoking cessation categories;unfavorable product mix; and
Continued manufacturing and supply chain efficiencies.
An increase of $18.6$229.7 million in operating expenses due to:
| |
• | A $24.5 million goodwill impairment charge related to our animal health business, (refer to Item 8. Note 3); |
Increased research and development investments of $6.5 million due to timing of clinical trials;
| |
• | A $6.2 million impairment charge related to the sale of the U.S. VMS business, (refer to Item 8. Note 2); |
| |
• | A $3.7 million impairment charge recorded on the held-for-sale assets associated with our animal health pet treats plant, (refer to Item 8. Note 9); partially offset by |
| |
• | Decreased restructuring expense of $9.9 million (refer to Item 8. Note 18); and |
Decreased selling and administrative expenses due to cost containment.
Perrigo Company plc - Item 7
CHCA
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | |
| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 |
Net sales | $ | 1,176.1 |
| | $ | 1,251.5 |
|
Gross profit | $ | 361.2 |
| | $ | 417.9 |
|
Gross profit % | 30.7 | % | | 33.4 | % |
Operating income | $ | 151.1 |
| | $ | 209.2 |
|
Operating income % | 12.9 | % | | 16.7 | % |
Net sales increased $75.4 million, or 6%, due primarily to:
New product sales of $122.9 million related primarily to certain new infant formula products;
| |
• | Incremental net sales due primarily to the Gelcaps and ScarAway® acquisitions of $20.2 million; and
|
A$66.0 million increase in existing sales primarily attributable to increased sales volumes of smoking cessation, cough/cold, and gastrointestinal products; offset partially by
A decline of $22.9 million in sales of existing products, primarily in animal health and diabetic care;
Discontinued products of $99.6 million related primarily to reformulated infant formula, analgesic, and animal health products; and
Unfavorable foreign currency translation movement of $11.2 million.
Operating income increased $58.1 million, or 38%, as a result of:
An increase of $56.7 million in gross profit due to:
Improved purchase prices and efficiencies in manufacturing facilities; and
| |
• | Incrementally higher gross profit attributable primarily to the Gelcaps and ScarAway® acquisitions; and
|
A decrease of $1.4 million in operating expenses due to:
Decreased R&D spend of $13.6 million due to relative timing of clinical trials; offset partially by
An increase in restructuring expense of $10.9 million related to strategic organizational enhancements; and
| |
• | Increased administrative expenses of $1.9 million primarily related to the Gelcaps and ScarAway® acquisitions.
|
CONSUMER HEALTHCARE INTERNATIONAL
Recent Trends and Developments
Management has developed a strategy to: (1) implement a brand prioritization to address certain market dynamics, with an objective to balance the cost of advertising and promotional investments with expected contributions from category sales, (2) restructure the sales force in certain markets to more effectively serve customers, and (3) in-source certain product manufacturing and development. The combination of these actions is expected to improve the segment's focus on higher value OTC products, reduce selling costs and improve operating margins in the segment.
As part of our previously announced strategic initiatives, management implemented improvements and evaluated the overall cost structures within our CHCI segment in the following ways:
On December 8, 2016, we announced the cancellation of the unprofitable EuroGenerics NV distribution agreement in Belgium. The year-over-year effect of the cancellation, combined with the
Perrigo Company plc - Item 7
CHCI
exit of certain OTC distribution agreements, reduced our net sales by $200.3 million in 2017, with an immaterial impact to operating income.
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• | We made progress on our previously announced restructuring plans to right-size the Omega business due to the impact of market dynamics on sales volumes. During the year ended December 31, 2017, we recognized $17.1 million of restructuring expense in the CHCI segment (refer to Item 8. Note 18). |
Management continues to evaluate the most effective business model for each country, aligning our sales infrastructure and actively integrating sales strategies with promotional programs.
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• | On August 25, 2017, we completed the sale of our Russian business, which was previously classified as held-for-sale, to Alvogen Pharma LLC. The total sale price was €12.7 million ($15.1 million), inclusive of an estimated working capital adjustment, which resulted in an immaterial gain in the segment (refer to Item 8. Note 2). |
The combination of these actions improved the segment's focus on higher value OTC products, reduced selling costs and improved operating margins in the segment.
The CHCI segment has been positively impacted by market dynamics in countries such as the Nordics, Italy, and Portugal offset by softness in certain brand categories in France and Germany, as well as by unfavorable foreign currency impacts primarily in the U.K. related to Brexit.
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
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| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 |
Net sales | $ | 1,652.2 |
| | $ | 1,491.0 |
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Gross profit | $ | 693.4 |
| | $ | 682.0 |
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Gross profit % | 42.0 | % | | 45.7 | % |
Operating income (loss) | $ | (2,087.4 | ) | | $ | 12.5 |
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Operating income (loss) % | (126.3 | )% | | 0.8 | % |
Net sales decreased $161.2 million, or 10%, over the prior year due to:
The absence of $200.3 million in sales attributable to the cancellation of unprofitable distribution contracts;
Discontinued products of $14.7 million; and
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• | A net decrease in sales of existing products of $11.3 million due primarily to the absence of sales from our exited Russian business (refer to Item 8. Note 2); partially offset by |
New product sales of $64.1 million.
Operating income increased $2.1 billion, due to:
A $11.4 million decrease in gross profit due primarily to:
Operational efficiencies across the organization; more than offset by
Lower volumes in sales; and
Lower margins in our U.K. store brand business.
A decrease of $2.1 billion in operating expenses due primarily to:
Perrigo Company plc - Item 7
CHCI
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• | The absence of $2.0 billion of impairment charges on certain indefinite-lived and definite-lived intangible brand category assets and goodwill impairments in the Branded Consumer Healthcare-Rest of World ("BCH-ROW") and BCH-Belgium reporting units recorded in the prior year period (refer to Item 8. Note 3); and |
A decrease in selling and administrative expenses of $66.6 million due to previously announced strategic initiatives to better align promotional investments with sales and cost reduction initiatives taken in the current year; offset partially by
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• | A $4.8 million impairment charge recorded related to the Russian business (refer to Item 8. Note 2); and |
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• | Increased restructuring expense of $3.8 million related to strategic organizational enhancements (refer to Item 1. Note 18). |
Gross profit as a percentage of net sales was 3.7% higher due primarily to improved product mix primarily driven by the cancellation of certain unprofitable distribution contracts, as described above.
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• | Operating income as a percentage of net sales was 127.1% higher due primarily to the absence of $2.0 billion of intangible asset and goodwill impairment charges as discussed above (refer to Item 8. Note 3). |
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
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| Year Ended |
($ in millions) | December 31, 2015(1) | | December 31, 2016 |
Net sales | $ | 1,360.6 |
| | $ | 1,652.2 |
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Gross profit | $ | 614.7 |
| | $ | 693.4 |
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Gross profit % | 45.2 | % | | 42.0 | % |
Operating loss | $ | (124.3 | ) | | $ | (2,087.4 | ) |
Operating loss % | (9.1 | )% | | (126.3 | )% |
(1) Includes Omega results from March 30, 2015 to December 31, 2015.
Net sales increased $291.6 million, or 21%, over the prior year due to:
An additional three months of results from operations attributable to Omega;
New products totaling $119.0 million; and
Incremental nets sales due to the Naturwohl and GSK Product acquisitions totaling $84.2 million; offset partially by
A net $143.6 million decrease in sales volumes of existing products due primarily to:
Lower sales in the lifestyle category due in part to a product launch in the prior year;
Lower sales in the natural health and VMS category due primarily to timing of promotional activities;
Divestment of a European sports brand; and
The expiration of a distribution contract in the prior year;
Unfavorable foreign currency translation movement of $44.1 million; and
Discontinued products of $8.4 million.
Perrigo Company plc - Item 7
CHCI
Operating loss increased $2.0 billion, due to:
A $78.7 million increase in gross profit due to an additional three months of operations attributable to Omega; offset partially by
Decreased sales of existing products in the higher-margin lifestyle and natural health and VMS categories noted above;
Weaker performance in Belgium and Germany; and
Unfavorable foreign currency translation effect; more than offset by
An increase of $2.0 billion in operating expenses due primarily to:
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•◦ | Intangible asset and goodwill$218.4 million decrease in impairment charges totaling $2.0 billion, (referdue primarily to Item 8. Note 3);the absence of $213.2 million in impairment charges related to animal health goodwill and intangible assets and a $5.0 million decrease in certain IPR&D impairments; and |
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•◦ | Restructuring charges totaling $20.9$34.5 million related to strategic organizational enhancements (refer to Item 8. Note 18); |
An additional three months of operations from the Omega acquisition; offset partially by
Cost control measures.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
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| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 |
Net sales | $ | 177.1 |
| | $ | 833.0 |
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Gross profit | $ | 55.9 |
| | $ | 386.0 |
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Gross profit % | 31.6 | % | | 46.3 | % |
Operating income (loss) | $ | 14.1 |
| | $ | (148.5 | ) |
Operating income (loss) % | 8.0 | % | | (17.8 | )% |
Net sales increased $655.9 million, over the prior year due to:
Incremental net sales attributable to the Omega, Naturwohl and GSK acquisitions totaling $569.1 million; and
New products totaling $66.8 million; offset partially by
Unfavorable foreign currency translation movement of $14.8 million; and
Discontinued products of $3.8 million.
Operating income decreased $162.6 million, due to:
A $330.1 million increase in gross profit and a $492.7 million increase in operating expenses due to an additional six months of operations attributable to Omega.
PRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
We continue to experience a significant reduction in pricing expectations from historical levels in our RX segment due to competitive pressures. This softness in pricing is attributable to various factors, including increased focus from customers to capture supply chain productivity savings, competition in specific products, and consolidation of certain customers. We expect this softness to continue to impact the segment for the foreseeable future, and we are forecasting a high single digit pricing decline in this segment for the year ending December 31, 2018.
Perrigo Company plc- Item 7
RX
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• | During the three months ended December 31, 2016, the U.S. market for Entocort® (Budesonide) capsules, including both brand and authorized generic capsules, experienced significant and unexpected increased competition, which reduced our future revenue stream. As a result, our net salesdecrease in the RX segment for the year ended December 31, 2017 were negatively impacted by $67.2 million.
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We are continuing our previously announced portfolio review process, which includes the ongoing comprehensive internal evaluation of the RX segment's market position, growth opportunities, and interdependencies with our manufacturing and shared service operations to determine if strategic alternatives should be explored.
During the year ended December 31, 2017, we sold various Abbreviated New Drug Applications ("ANDAs") for a total gain of $23.0 million.
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
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| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 |
Net sales | $ | 1,042.8 |
| | $ | 969.7 |
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Gross profit | $ | 501.1 |
| | $ | 449.7 |
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Gross profit % | 48.1 | % | | 46.4 | % |
Operating income (loss) | $ | (0.2 | ) | | $ | 307.6 |
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Operating income (loss) % | — | % | | 31.7 | % |
Net sales decreased $73.1 million, or 7%, due to:
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• | New product sales of $75.9 million due primarily to sales of Scopolamine and Testosterone 2% topical (generic equivalent to Axiron®); more than offset by
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Decreased sales of existing products of $78.5 million due primarily to pricing pressures across the portfolio;
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• | Lower Entocort® sales of $67.2 million; and
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Discontinued products of $3.3 million.
Operating income increased $307.8 million, as a result of:
A decrease of $51.4 million in gross profit due primarily to:
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• | Lower Entocort® sales as noted above; and
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Pricing pressures as discussed above.
A decrease of $359.2 million in operating expenses due to:
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• | The absence of a $342.2 million impairment charge related to the Entocort® intangible asset (refer to Item 8. Note 3); |
A $23.0 million gain on sales of certain ANDAs;
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• | A $15.4 million net gain related to contingent consideration (refer to Item 8. Note 6); |
Decreased selling expenses of $17.4 million due primarily to the prior year specialty pharmaceuticals sales force restructuring initiative; and
Decreased R&D expenses of $8.3 million due to timing of clinical trials, lower legal spend, and lower ongoing costs on certain projects; offset partially by
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• | Impairment charges related to certain definite-lived intangible assets, certain fixed assets and IPR&D of $34.9 million (refer to Item 8. Note 3); |
Perrigo Company plc- Item 7
RX
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• | Increased administrative expenses of $6.2 million due primarily to the settlement of our antitrust violation lawsuit (refer to Item 8. Note 16); and |
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• | Increased restructuring expenses of $3.8 million related to strategic organizational enhancements (refer to Item 8. Note 18). |
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• | Gross profit as a percentage of net sales was 1.7% lower due primarily to lower sales of Entocort® as discussed above.
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• | Operating income as a percentage of net sales was 31.7% higherexpense due primarily to the absence of a $342.2$50.0 million impairment chargeupfront license fee payment to enter into a license agreement with Merck; partially offset by current year innovation investments; partially offset by
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◦ | $15.5 million increase in selling and administrative expenses due primarily to increased advertising and promotional spending to support product launches and eCommerce growth, an increase in employee-related expenses, and the acquisition of Ranir; and |
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◦ | $7.1 million increase in other operating expenses due to an asset abandonment related to the Entocort® intangible asset (refer to Item 8. Note 3).our operations in Vermont. |
Perrigo Company plc - Item 7
CSCA
Year Ended December 31, 20162018 vs. Year Ended December 31, 2015
2017
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| Year Ended |
(in millions) | December 31, 2018 | | December 31, 2017 |
Net sales | $ | 2,411.6 |
| | $ | 2,429.9 |
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Gross profit | $ | 789.0 |
| | $ | 843.7 |
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Gross profit % | 32.7 | % | | 34.7 | % |
Operating income | $ | 174.4 |
| | $ | 470.9 |
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Operating income % | 7.2 | % | | 19.4 | % |
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| Year Ended |
($ in millions) | December 31, 2015 | | December 31, 2016 |
Net sales | $ | 1,001.9 |
| | $ | 1,042.8 |
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Gross profit | $ | 543.3 |
| | $ | 501.1 |
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Gross profit % | 54.2 | % | | 48.1 | % |
Operating income (loss) | $ | 377.8 |
| | $ | (0.2 | ) |
Operating income % | 37.7 | % | | — | % |
Net sales increased $40.9decreased $18.3 million, or 4%1%, due primarily to:
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• | Net sales attributable to the Entocort® and Tretinoin Products acquisitions totaling $150.9 million; and
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New$14.9 million, or 1%, net decrease due to discontinued products of $32.1 million and a decrease of existing product sales of $68.0 million due primarily to sales of Benzoyl Peroxide 5%-Clindamycin 1% gel (a generic version of Benzaclin™); offset partially by
Decreased sales of existing products of $174.1 million due to declined sales volumelost distribution and channel dynamics in our animal health category and normal levels of certain products,competition-driven pricing pressure, across the portfolio, and the lack of exclusive market position for two key products versus the prior year;partially offset by a $48.7 million increase due to new product sales; and
Discontinued products of $3.9 million.
$3.4 million decrease due to unfavorable Mexican peso foreign currency translation.
Operating income decreased $378.0$296.5 million, or 100%63%, due primarily to:
$54.7 million decrease in gross profit, or a 200 basis point decrease in gross profit as a result of:percentage of net sales, due primarily to operating variances and increased input costs, lower sales in the higher margin animal health business and pricing pressure; and
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• | A decrease of $42.2 million in gross profit due primarily to the pricing pressure noted above, as well as higher amortization expense from the Entocort® and Tretinoin Products acquisitions; and
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An$241.8 million increase of $335.8 million in operating expenses due primarily to:
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•◦ | A $342.2$218.0 million increase in impairment chargecharges due primarily to animal health goodwill and intangible assets; and
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◦ | $44.8 million increase in R&D expense due primarily to a $50.0 million upfront license fee payment to enter into a license agreement with Merck; partially offset by |
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◦ | $26.9 million decrease in restructuring expense related to the Entocort® intangible assets, (refer to Item 8. Note 3);cost reduction initiatives taken in 2017. |
Increased selling
CONSUMER SELF-CARE INTERNATIONAL
Recent Developments
During the three months ended December 31, 2019, we identified impairment indicators related to certain pain relief products that we licensed from a third party and administration expensesreported as a definite-lived intangible asset. The impairment indicators related to commercial launch delays and a decision by the licensor to not extend the license agreement upon expiration. We determined the asset was fully impaired and recorded an asset impairment of $9.3 million, and$9.7 million.
Increased R&D investments of $3.0 million due to timing of clinical trials; offset partially by
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• | The absenceDuring the three months ended September 28, 2019, after regulatory bodies announced worldwide that Ranitidine may potentially contain NDMA, a known environmental contaminant, we promptly began testing our externally sourced Ranitidine API and Ranitidine-based products. On October 8, 2019, we halted shipments of an $18.0the product based upon preliminary results. Based on the totality of data gathered, we made the decision to conduct a voluntary retail market withdrawal, which resulted in a decrease in net sales of $1.8 million R&D payment madeand a decrease in connection with a R&D contractual arrangementgross profit of $2.9 million in the prior year (refer to Item 8. Note 17).our CSCI segment. |
On July 1, 2019, we acquired Ranir, a transaction that advances our transformation to a consumer-focused, self-care company while enhancing our position as a global leader in consumer self-care solutions. Ranir's non-U.S. operations are primarily in the United Kingdom, France, Germany, and China.
Perrigo Company plc- Item 7
RXCSCI
Six MonthsSegment Financial Results
Year Ended December 31, 20152019 vs. Six Months Ended December 27, 201431, 2018
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| Year Ended |
(in millions) | December 31, 2019 | | December 31, 2018 |
Net sales | $ | 1,382.2 |
| | $ | 1,399.3 |
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Gross profit | $ | 639.5 |
| | $ | 668.7 |
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Gross profit % | 46.3 | % | | 47.8 | % |
Operating income | $ | 19.6 |
| | $ | 6.8 |
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Operating income % | 1.4 | % | | 0.5 | % |
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| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 |
Net sales | $ | 436.7 |
| | $ | 502.6 |
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Gross profit | $ | 230.5 |
| | $ | 253.4 |
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Gross profit % | 52.8 | % | | 50.4 | % |
Operating income | $ | 168.8 |
| | $ | 181.9 |
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Operating income % | 38.6 | % | | 36.2 | % |
Net sales increased $65.9decreased $17.1 million, or 15%1%, due primarily to:
New product sales of $41.2 million related primarily to the launches of Clobetasol Propionate 0.05% spray, Tacrolimus 0.1% ointment, and Testosterone gel 1%; and
Net sales attributable to the Lumara product acquisition of $7.0 million; offset partially by
A decrease in volumes of certain existing products.
Operating income increased $13.1 million, or 8%, as a result of:
An increase of $22.9 million in gross profit due primarily to:
Higher net sales and favorable product mix; and
Certain pricing initiatives.
Partially offset by a $9.8 millionincrease in operating expenses due to:
Increased selling and administration expense related to the specialty pharmaceuticals sales force; and
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• | An$71.6 million, or 5%, net increase due to new product sales of $108.0 million driven by the launch of XLS-Medical Forte 5 and new products in the Phytosun® naturals portfolio, a $45.0 million increase due to our acquisition of Ranir, and volume increases in our UK store brand business, partially offset by lower net sales in France associated with restructuring the sales force and a $13.1 million decrease due to discontinued products; more than offset by
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$88.7 million decrease due to:
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◦ | $86.9 million decrease due primarily to unfavorable Euro foreign currency translation; and |
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◦ | $1.8 million decrease due to the retail market withdrawal of Ranitidine products. |
Operating income increased $12.8 million, or 188%, due to:
$29.2 million decrease in gross profit due primarily to unfavorable Euro foreign currency translation, partially offset by the acquisition of Ranir and a 150 basis point decrease in gross profit as a percentage of net sales due primarily to improved performance in the UK store brand business and the acquisition of Ranir, both of which have relatively lower gross margins than the overall portfolio; more than offset by
$42.0 million decrease in operating expenses due primarily to:
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◦ | $42.4 million decrease in selling and administrative expenses due primarily to favorable Euro foreign currency translation, partially offset by an increase in employee-related expenses; and |
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◦ | $7.7 million decrease in restructuring expenseexpenses due primarily to the absence of $2.6cost reduction initiatives that were taken in the prior year; partially offset by |
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◦ | $7.9 million relatedincrease in impairment charges due primarily to our strategic organizational enhancements (refer to Item 8. Note 18).a certain definite-lived intangible asset. |
Year Ended December 31, 2018 vs. December 31, 2017
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| Year Ended |
(in millions) | December 31, 2018 | | December 31, 2017 |
Net sales | $ | 1,399.3 |
| | $ | 1,406.2 |
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Gross profit | $ | 668.7 |
| | $ | 651.2 |
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Gross profit % | 47.8 | % | | 46.3 | % |
Operating income (loss) | $ | 6.8 |
| | $ | (2.7 | ) |
Operating income (loss) % | 0.5 | % | | (0.2 | )% |
Perrigo Company plc - Item 7
CSCI
Net sales decreased $6.9 million due primarily to:
$11.2 million net decrease due primarily to lower sales in the healthy lifestyle and upper respiratory categories and $19.7 million decrease due to discontinued products, partially offset by new product sales of $76.6 million; partially offset by
$4.3 million increase due to:
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◦ | $37.3 million increase due to favorable Euro foreign currency translation; partially offset by |
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◦ | $33.0 million decrease due to the exited Russian business and 2017 distribution phase out initiatives. |
Operating income increased $9.5 million due to:
$17.5 million increase in gross profit, or a 150 basis point increase in gross profit as a percentage of net sales, due primarily to brand prioritization and exit of low margin businesses, improved pricing and benefits from continued insourcing initiatives; partially offset by
$8.0 million increase in operating expenses due primarily to $5.8 million increase in distribution expense, and $3.0 million increase in R&D expense due primarily to innovation investments and the effect of foreign currency translation.
SPECIALTY SCIENCESPRESCRIPTION PHARMACEUTICALS
Recent Trends and Developments
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• | Although pricing pressure is showing some signs of moderation, during 2019 we continued to experience a significant year-over-year reduction in pricing in our RX segment due to competitive pressure. We expect softness in pricing to continue to impact the segment for the foreseeable future. |
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• | On March 27, 2017,February 24, 2020, along with our partner Catalent Pharma Solutions, we announcedreceived approval from the completed divestmentU.S. Food and Drug Administration on our abbreviated new drug application for generic albuterol sulfate inhalation aerosol, the first AB-rated generic version of our TysabriProAir® financial asset HFA. Shortly after approval, we launched with limited commercial quantities and anticipate that we will be in a position to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. Asprovide a resultsteady supply of this transaction, we transferredproduct by the entire financial asset to Royalty Pharma and recorded a $17.1 million gain duringfourth quarter of 2020. |
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• | During the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017 (refer2019, we tested our RX U.S. reporting unit for impairment. The impairment indicators related to Item 8. Note 6a combination of industry and Critical Accounting Estimates for additional information onmarket factors that led to reduced projections of future cash flows. We determined the contingent milestones).reporting unit was impaired and recorded an impairment charge of $109.2 million. |
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• | During the three months ended December 31, 2019, we identified impairment indicators on a definite-lived intangible asset related to our clindamycin and benzoyl peroxide topical gel (generic equivalent to Benzaclin®). Increased competition caused price erosion that lowered our long-range revenue forecast, which indicated the asset was no longer recoverable and was partially impaired. We recorded an asset impairment of $21.2 million. |
On July 2, 2019, we purchased the Abbreviated New Drug Application ("ANDA") for a generic gel product for $49.0 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019.
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• | During the three months ended September 28, 2019, we identified impairment indicators related to our Evamist® branded product, which is a definite-lived intangible asset. The indicators related to a decline in sales volume and a corresponding reduction in our long-range revenue forecast. We recorded an asset impairment of $10.8 million. |
On May 17, 2019, we purchased the ANDA for a generic product used to relieve pain for $15.7 million in cash, which we capitalized as a developed product technology intangible asset. We launched the product during the third quarter of 2019.
Perrigo Company plc- Item 7
RX
During the three months ended June 29, 2019, we identified impairment indicators for a certain definite-lived asset related to changes in pricing and competition in the market, which lowered the projected cash flows we expect to generate from the asset. We recorded an asset impairment of $27.8 million.
Segment Financial Results
Year Ended December 31, 2019 vs. December 31, 2018
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| Year Ended |
(in millions) | December 31, 2019 | | December 31, 2018 |
Net sales | $ | 967.5 |
| | $ | 920.8 |
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Gross profit | $ | 334.9 |
| | $ | 373.9 |
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Gross profit % | 34.6 | % | | 40.6 | % |
Operating income | $ | 2.6 |
| | $ | 214.6 |
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Operating income % | 0.3 | % | | 23.3 | % |
Net sales increased $46.7 million, or 5%, due primarily to:
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• | $87.5 million increase due to new product sales of $86.3 million driven mainly by Acyclovir cream (generic equivalent to Zovirax® cream), Testosterone Gel 1.62% (generic equivalent to Androgel®), and the Scopolamine Patch relaunch and higher volumes of existing product sales to meet the increased demand of our existing customers, partially offset by competition-driven pricing pressure; partially offset by |
$41.8 million of discontinued products.
Operating income decreased $212.0 million, or 99%, due to:
$39.0 million decrease in gross profit, or a 600 basis point decrease in gross profit as a percentage of net sales, due primarily to competition-driven pricing pressure, and unfavorable product mix; and
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• | $173.0 million increase in operating expense due primarily to $170.7 million increase in impairment charges related to goodwill, certain definite-lived intangible assets and IPR&D, and a $4.8 million increase in R&D expense due primarily to pre-commercialization R&D costs for generic albuterol sulfate inhalation aerosol, the generic version of ProAir® HFA. |
Year Ended December 31, 20162018 vs. Year Ended December 31, 20152017
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| Year Ended |
(in millions) | December 31, 2018 | | December 31, 2017 |
Net sales | $ | 920.8 |
| | $ | 1,054.4 |
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Gross profit | $ | 373.9 |
| | $ | 454.6 |
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Gross profit % | 40.6 | % | | 43.1 | % |
Operating income | $ | 214.6 |
| | $ | 306.1 |
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Operating income % | 23.3 | % | | 29.0 | % |
Net sales decreased $133.6 million, or 13%, due primarily to:
$176.8 million decrease due to $162.2 million decrease in sales of existing products due primarily to increased competition-driven pricing pressure and decreased sales volumes of certain products and $14.6 million decrease due to discontinued products; partially offset by
Perrigo Company plc- Item 7
RX
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• | $43.2 million increase due to new product sales due primarily to Testosterone Gel 1.62% (generic equivalent to Androgel®). |
Operating income decreased $91.5 million, or 30%, due to:
$80.7 million decrease in gross profit, or a 250 basis point decrease in gross profit as a percentage of net sales, due primarily to pricing pressure and unfavorable product mix as a result of sales growth in lower margin products; and
$10.8 million increase in operating expense due primarily to:
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◦ | $23.0 million increase for the absence of the gain on the sale of certain ANDAs recognized in the prior year, $15.0 million increase for the absence of the gain related to contingent consideration adjustments, and $9.8 million increase in R&D expense due to timing of clinical trials; partially offset by |
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◦ | $34.9 million decrease in impairment charges related to certain definite-lived intangible assets and IPR&D. |
OTHER
We previously had two legacy segments, Specialty Sciences and Other, which contained our Tysabri® financial asset and API businesses, respectively, which we divested. Following these divestitures, there were no substantial assets or operations left in either of these segments. Effective January 1, 2017, all expenses associated with our former Specialty Sciences segment were $201.2 million formoved to unallocated expenses.
During the year ended December 31, 2015, compared2017, we completed the divestment of the Tysabri® financial asset to $15.0Royalty Pharma for $2.2 billion upfront in cash and up to $250.0 million forand $400.0 million in milestone payments if the priorroyalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain in Change in financial assets. See "Interest, Other (Income) Expense and Change in Financial Assets (Consolidated)" below.
During the year
period. The decreases of $186.2 million primarily relates to a $199.6 million impairment charge related to the Tysabri® goodwill (refer to Item 8. Note 3).
Perrigo Company plc- Item 7
Specialty Sciences
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
Operating expenses were $6.5 million for the six months ended December 31, 2015, compared to $9.0 million for the prior year period. The decreases of $2.5 million was due to a reduction in legal expenses.
OTHER
Recent Trends and Developments
On April 6, 2017, we completed the sale of our India API business to Strides Shasun Limited. We received $22.2 million ofin proceeds, inclusive of an estimated working capital adjustment, which resultedresulting in an immaterial gain.gain recorded in Other (income) expense, net on the Consolidated Statements of Operations. Prior to closing the sale, we determined that the carrying value of the India API business exceeded its fair value less the cost to sell, resulting in an impairment charge of $35.3 million, which was recorded in Impairment charges on the Consolidated Statements of Operations for the year ended December 31, 2016 (refer to Item 8. Note 2).2016.
On November 21,During the year ended December 31, 2017, we completed the sale of our Israel API business which was previously classified as held-for-sale, to SK Capital for a sale price of $110.0 million, which resulted in an immaterial gain recorded in our Other segment in Other(income) expense, (Income), net on the Consolidated Statements of Operations (refer to Item 8. Note 2 and Note 6).Operations.
Segment Results
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
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| | | | | | | |
| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 |
Net sales | $ | 78.5 |
| | $ | 55.6 |
|
Gross profit | $ | 32.3 |
| | $ | 30.9 |
|
Gross profit % | 41.2 | % | | 55.6 | % |
Operating income | $ | 6.1 |
| | $ | 8.7 |
|
Operating income % | 7.8 | % | | 15.6 | % |
Net sales decreased $22.9 million due primarily to competition on certain products and the sale of our Israel API business (refer to Item 8. Note 2). Operating income increased $2.6 million due to a $1.4 million decrease in gross profit due primarily to a decrease in sales of existing products offset by a $4.0 million decrease in operating expenses. The decrease in operating expenses related primarily to the absence of a $8.3 million impairment charge recorded on the India API business and certain definite-lived intangible assets in the prior year; offset partially by a $3.3 million impairment charge recorded on the Israel API business in the current period.
Perrigo Company plc - Item 7
Other
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
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| | | | | | | |
| Year Ended |
($ in millions) | December 31, 2015 | | December 31, 2016 |
Net sales | $ | 98.0 |
| | $ | 78.5 |
|
Gross profit | $ | 44.7 |
| | $ | 32.3 |
|
Gross profit % | 45.5 | % | | 41.2 | % |
Operating income (loss) | $ | (7.1 | ) | | $ | 6.1 |
|
Operating income (loss) % | (7.3 | )% | | 7.8 | % |
Net sales decreased $19.5 million due primarily to competition on certain products, in particular, U.S. sales of Temozolomide. Operating income increased $13.2 million due primarily to the absence of a $29.0 million impairment on our India API held-for-sale assets recorded in the prior year period (refer to Item 8. Note 9). Gross profit decreased $12.4 million as a result of increased competition, a $6.3 million impairment charge recorded on the India API held-for-sale business (refer to Item 8. Note 9), and a $2.0 million impairment charge related to a definite-lived intangible asset (refer to Item 8. Note 3).
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
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| | | | | | | |
| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 |
Net sales | $ | 54.8 |
| | $ | 45.1 |
|
Gross profit | $ | 26.2 |
| | $ | 21.6 |
|
Gross profit % | 47.7 | % | | 47.8 | % |
Operating income (loss) | $ | 14.5 |
| | $ | (19.5 | ) |
Operating income (loss) % | 26.4 | % | | (43.3 | )% |
Net sales decreased $9.7 million, or 18%, due primarily to competition on certain products and unfavorable changes in foreign currency translation. Operating income decreased $34.0 million as a result of a decrease of $4.6 million in gross profit due primarily to a decrease in sales of existing products and an impairment charge of $29.0 million on our India API held-for-sale assets (refer to Item 8. Note 9).
Unallocated Expenses
Unallocated expenses are comprised of certain corporate services not allocated to our reporting segments and are recorded above Operating income on the Consolidated Statements of Operations. Unallocated expenses were as follows (in millions):
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| | | | | | | | | | | | | | | | | | |
Six Months Ended | | Year Ended |
December 27, 2014 | | December 31, 2015 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
$ | 49.6 |
| | $ | 149.0 |
| | $ | 220.9 |
| | $ | 116.6 |
| | $ | 174.7 |
|
|
| | | | | | | | | | |
Year Ended |
December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
$ | 231.4 |
| | $ | 159.2 |
| | $ | 183.9 |
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Perrigo Company plc - Item 7
Other
The $58.1$72.2 million increase for the year ended December 31, 20172019 compared to the prior year was due primarily to a $31.0 million increase in legal and consulting fees partially due to the absence of a $17.8 million insurance recovery received in the prior year, a $15.6 million increase in acquisition and integration-related charges related to the Ranir acquisition, a $13.8 million increase in employee compensation expenses, and a $10.7 million increase due primarily to our strategic transformation initiative and the reorganization of our executive management team.
The $24.7 million decrease for the year ended December 31, 2018 compared to the prior year was due primarily to an increaseinsurance recovery of $17.8 million, a decrease in share-based compensationlegal and consulting fees of $8.7 million and, a decrease in restructuring expense of $12.6 million driven primarily by the resignation of certain executives, an increase of $41.1 million of administrative expenses driven by legal fees, consulting fees and employee-related expenses, and an increase in restructuring of $6.0$5.5 million related to strategic organizational enhancements (referenhancements; partially offset by an increase in employee-related expenses of $5.2 million.
Interest, Other (Income) Expense and Change in Financial Assets (Consolidated)
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| | | | | | | | | | | |
| Year Ended |
(in millions) | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
Change in financial assets | $ | (22.1 | ) | | $ | (188.7 | ) | | $ | 24.9 |
|
Interest expense, net | $ | 121.7 |
| | $ | 128.0 |
| | $ | 168.1 |
|
Other (income) expense, net | $ | (66.0 | ) | | $ | 6.1 |
| | $ | (10.1 | ) |
Loss on extinguishment of debt | $ | 0.2 |
| | $ | 0.5 |
| | $ | 135.2 |
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Change in Financial Assets
The proceeds from our 2017 sale of the Tysabri® financial asset consisted of $2.2 billion in upfront cash and up to Item 8. Note 15).
The $104.3$250.0 million decrease forand $400.0 million in contingent milestone payments related to 2018 and 2020, respectively. During the year ended December 31, 20162019 we received the $250.0 million contingent milestone payment.
During the year ended December 31, 2019 the fair value of the Royalty Pharma milestone payment related to 2020 increased by $22.1 million to $95.3 million. These adjustments were driven by higher projected global net sales of Tysabri® and the estimated probability of achieving the earn-out.
In order for us to receive the milestone payment related to 2020 of $400.0 million, Royalty Pharma payments from Biogen for Tysabri® sales in 2020 must exceed $351.0 million. The Royalty Pharma payments from Biogen for Tysabri® were $337.5 million in 2018. If Royalty Pharma payments from Biogen for Tysabri® sales do not meet the prescribed threshold in 2020, we will write-off the $95.3 million asset and record a loss. If the prescribed threshold is exceeded, we will increase the asset to $400.0 million and recognize income of $304.7 million in Change in financial assets on the Consolidated Statements of Operations (refer to Item 8. Note 7).
During the year ended December 31, 2018, royalties on global net sales of Tysabri® received by Royalty Pharma met the 2018 threshold resulting in an increase to the asset and a gain of $170.1 million recognized in Change in financial assets on the Consolidated Statement of Operations. Also during that period, the fair value of the remaining Royalty Pharma contingent milestone payment related to 2020 increased $18.6 million due to higher projected global net sales of Tysabri® and the estimated probability of achieving the contingent milestone payment related to 2020.
Interest Expense, Net
The $6.3 million decrease during the year ended December 31, 2019 compared to the prior year was due primarily to changes in our underlying hedge exposure and interest income (refer to Item 8. Note 9).
The $40.1 million decrease during the year ended December 31, 2018 compared to the prior year was the result of early debt repayments made during the year ended December 31, 2017.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Other (Income) Expense, Net
The $72.1 million change was due primarily to a $71.7 million pre-tax gain on the sale of our animal health business (refer to Item 8. Note 3)
The $16.2 million decrease during the year ended December 31, 2018 compared to the prior year was due primarily to the absence of legal and professional fees related to our defense against the unsolicited takeover bid by Mylan of $100.3 million and Omega acquisition-related fees of $18.1 million. We also experienced a $15.0 million reduction in share-based compensation compared to the prior year due primarily to the resignation of our former Chief Executive Officer, Joseph C. Papa. These decreases were offset partially by a $36.2 million increase in legal and professional fees in the current year.
The $99.4 million increase for the six months ended December 31, 2015 compared to the prior year period was due primarily to $86.9 million in fees incurred in our defense against the unsolicited takeover bid by Mylan and $7.5 million in corporate restructuring charges.
Interest, Other and Change in Financial Assets (Consolidated)
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| | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
Change in financial assets | $ | (46.9 | ) | | $ | (57.3 | ) | | $ | (88.8 | ) | | $ | 2,608.2 |
| | $ | 24.9 |
|
Interest expense, net | $ | 56.7 |
| | $ | 89.9 |
| | $ | 179.1 |
| | $ | 216.6 |
| | $ | 168.1 |
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Other expense (Income), net | $ | 60.3 |
| | $ | 25.2 |
| | $ | 299.1 |
| | $ | 22.7 |
| | $ | (10.1 | ) |
Loss on extinguishment of debt | $ | 9.6 |
| | $ | 0.9 |
| | $ | 1.8 |
| | $ | 1.1 |
| | $ | 135.2 |
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Change in Financial Assets
Prior to its divestiture on March 27, 2017, we accounted for the Tysabri® royalty stream as a financial asset and had elected to use the fair value option model with changes in fair value presented in Net income (loss) under the caption Change in financial assets. Royalty rights were $24.9 million of expense, $2.6 billion of expense and $88.8 million of income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, respectively. Royalty rights were $57.3 million of income and $46.9 million of income for the six months ended December 31, 2015 and December 27, 2014, respectively. Royalty rights were $78.5 million of income and $26.6 million of income for the years ended June 27, 2015 and June 28, 2014, respectively, resulting in a change in financial asset of $2.6 billion, $2.7 billion, $10.4 million, and $51.9 million for the year ended December 31, 2017, December 31, 2016, six months ended December 31, 2015, and the year ended June 27, 2015 compared to the prior year periods, respectively (refer to Item 8. Note 6 for additional information on the assumptions).
In the first quarter of 2016, a competitor's pipeline product, Ocrevus®, received breakthrough therapy designation from the U.S. Food and Drug Administration ("FDA"). Breakthrough therapy designation is granted when a drug is intended alone or in combination with one or more other drugs to treat a serious or life threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. In June 2016, the FDA granted priority review with a target action date in December 2016. A priority review is a designation when the FDA will direct overall attention and resources to the evaluation of applications for drugs that, if approved, would be significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications. The product was approved late in the first quarter of 2017. The product is expected to compete with Tysabri®, and we expected it to have a significant negative impact on the Tysabri® royalty stream. Industry analysts believe that, based on released clinical study information, Ocrevus® will compete favorably against Tysabri® in the relapsing, remitting multiple sclerosis market segment due to its high efficacy and convenient dosage form.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Given the new market information for Ocrevus®, we used industry analyst estimates to reduce our first ten year growth forecasts from an average growth of approximately 3.4% in the fourth calendar quarter of 2015 to an average decline of approximately minus 2.0% in the third and fourth calendar quarters of 2016. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri® financial asset. As of December 31, 2016, the financial asset was adjusted based on the strategic review and sale process. These effects, combined with the change in discount rate each quarter, led to a reduction in fair value of $204.4 million, $910.8 million, $377.4 million and $1.1 billion in the first, second, third and fourth quarters of 2016, respectively.
On March 27, 2017, we announced the completed divestment of our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0$10.0 million in milestone payments if the royaltiesincome related to royalty rights, a $9.5 million loss on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using theour fair value option method,investment securities, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.
We valued the contingent milestone payments using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.07% as of December 31, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. During the year ended December 31, 2017, the fair value of the Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projected Tysabri® revenues due to the launch of Ocrevus® late in the first quarter of 2017.
In addition, payment of the contingent milestone payments is dependent on global net sales of Tysabri®. Of the $134.5$4.5 million of estimated fair valued contingent milestone payments as of December 31, 2017, $79.7 million and $54.8 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri® global net sales do not meet the prescribed threshold in 2018, we will write off the $79.7 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250.0 million and recognize income of $170.3 million in Change in financial assets on the Consolidated Statement of Operations. If Tysabri® global net sales do not meet the prescribed threshold in 2020, we will write off the $54.8 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $400.0 million and recognize income of $345.2 million in Change in financial assets on the Consolidated Statement of Operations.
Global Tysabri® net sales need to exceed $1.9 billion and $2.0 billion in 2018 and 2020, respectively, in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us. Tysabri® net sales are anticipated to decline on a global basis in 2018, compared to 2017, due to increased competition from Ocrevus®, offset by volume growth in Tysabri® international markets (refer to Item 8. Note 6).
Interest Expense, Net
Interest expense, net was $168.1 million for the year ended December 31, 2017, compared to $216.6 million in the prior year. The $48.5 million decrease for the year ended December 31, 2017 compared to the prior year was the result of the early debt repayments made during the year ended December 31, 2017.
Interest expense, net was $216.6 million for the year ended December 31, 2016, compared to $179.1 million in the prior year. The $37.5 million increase for the year ended December 31, 2016 compared to the prior year was due to interest incurred on the debt assumed in the Omega acquisition and borrowings on our revolving credit agreements during the year ended December 31, 2016.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Interest expense, net was $89.9 million for the six months ended December 31, 2015, compared to $56.7 million in the prior year period. The $33.2 million increase for the six months ended December 31, 2015 compared to the prior year period was due primarily to the incremental increase in borrowings resulting from the Omega acquisition, including the issuance of $1.6 billion of senior notes in November 2014 and assumed Omega debt, of which $798.3 million was outstanding at December 31, 2015, as well as amounts drawn under our revolving credit facilities, including $380.0 million and $300.0 million outstanding under the 2015 Revolver and 2014 Revolver, respectively, at December 31, 2015.
Other Expense (Income), Net
Other expense (Income), net, was $10.1 million for the year ended December 31, 2017, compared to $22.7 million in the prior year. The $32.8 million decrease was due primarily to the absence of a $22.3 million equity investment impairment, $8.2 million of favorableunfavorable changes in revaluation of monetary assets and liabilities held in foreign currencies, and a $3.2 million reduction in equity method losses.
Other expense (Income), net, was $22.7 million for the year ended December 31, 2016, compared to $299.1 million in the prior year. The $276.4 million decrease was due primarily to the absence of the $259.8 million loss incurred in the prior year on the derivatives used to economically hedge fluctuations in the euro-denominated purchase price of the Omega and GSK Products acquisitions. The losses on the derivatives due to the changes in the EUR/USD exchange rate prior to their settlement economically offset the final settlement of the euro-denominated Omega purchase price paid on March 30, 2015.
Other expense (Income), net, was $25.2 million for the six months ended December 31, 2015, compared to $60.3 million in the prior year period. The $35.1 million decrease was due primarily to a $10.7 million other-than-temporary impairment of a marketable equity security, losses on equity method investments totaling $7.1 million, and a $4.8 million loss on a foreign currency derivative we entered into, to hedge against the change in the euro for the euro-denominated purchase price of the GSK Products acquisition,currencies; partially offset by the absence of a $64.7$5.9 million loss on hedges related to derivative activity to economically hedge fluctuationsthe extinguishment of debt in the euro-denominated purchase price of the Omega acquisitionprior year, and a $2.7 million gain of $12.5 million from the transfer of a rights agreement.on our equity method investments.
Loss on Extinguishment of Debt
During the year ended December 31, 2017, we recorded a $135.2 million loss on extinguishment of debt, which consisted of tender premium on debt repayments, transaction costs, write-off of deferred financing fees, and bond discounts related to the $500.0 million 3.500% senior notes due December 2021, $500.0 million 3.500% senior notes due March 2021, $400.0 million 4.900% senior notes due 2044, $800.0 million 4.000% senior notes due 2023, and $400.0 million 5.300% senior notes due 2043.discounts.
During the year ended December 31, 2016, we recorded a $1.1 million loss on extinguishment of debt, which consisted of deferred financing fees we wrote off primarily related to the prepayment of 1.300% 2016 Notes. During the six months and year ended December 31, 2015 we recorded a $0.9 million and $1.8 million loss on extinguishment of debt, respectively, which consisted of deferred financing fees we wrote off related to the undrawn tranche of certain credit facilities that we allowed to expire during the period. The $9.6 million and $10.5 million losses during the six months and year ended December 27, 2014 and June 27, 2015, respectively, consisted mainly of interest on the bridge agreement associated with financing the Omega acquisition. The $165.8 million loss recorded in the year ended June 28, 2014 consisted of make-whole payments, write-off of unamortized discounts, write-off of deferred financing fees, and interest on the bridge agreements associated with financing the Elan acquisition.
Perrigo Company plc - Item 7
Unallocated, Interest, Other, and Taxes
Income Taxes (Consolidated)
The effective tax rates were as follows:
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Six Months Ended | | Year Ended |
December 27, 2014 | | December 31, 2015 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
14.0 | % | | (376.2 | )% | | 103.3 | % | | 17.2 | % | | 57.3 | % |
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| | | | | | | |
Year Ended |
December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
14.6 | % | | 54.9 | % | | 57.3 | % |
The effective tax rate for the year ended December 31, 2017 was higher compared2019 decreased in comparison to the prior year ended December 31, 2016due primarily to a decrease in the U.S. valuation allowance offset by increased U.S. permanent adjustments largely due to an increase in the valuation allowance position due to current year activity, tax law changes in the U.S., increases in unrecognized tax benefits, offset by tax law changes in Belgium.disallowed interest expense.
The effective tax rate for the year ended December 31, 2016 was lower compared2018 decreased in comparison to the prior year ended December 31, 2015due primarily to the 2017 sale of API Israel and the one-time U.S. transition toll tax, offset by additional tax expense due to the impact of the asset impairmentsvaluation allowances in Belgium and state tax recorded during the year ended December 31, 2016. The effective tax rate for the year ended December 31, 2015 was impacted by the impairmentfuture distributions of Omega's intangible assets, India API assets being classified as held for sale, the valuation allowance on deferred taxes and Omega transaction costs.foreign earnings recorded in 2018.
The effective tax rate for the six months ended December 31, 2015 was significantly higher than for the six months ended December 27, 2014 due mainly to the impairment of Omega’s intangible assets and the related impacts on the valuation allowance position, as well as our India API assets being classified as held for sale. The effective tax rate was favorably affected by a reduction in the reserves for uncertain tax liabilities in the amount of $6.1 million for the six months ended December 31, 2015 related to various audit resolutions.
For the year ended December 31, 2017, statutory income tax rate changes in the U.S. and Belgium impacted the effective tax rate with a reduction to U.S. income tax expense of $2.4 million and increased Belgium income tax expense by $24.1 million. For the years ended December 31, 2016 and December 31, 2015, statutory income tax rate changes, primarily in Europe, favorably impacted the effective tax rate by $27.9 million and $4.0 million, respectively (refer to Item 8. Note 14).
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We finance our operations with internally generated funds, supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate other available financing sources including revolving bank credit and securities offerings. In determining our future capital requirements, we regularly consider, among other factors, known trends and uncertainties, such as the Notice of Assessment ("NoA") and the draft and final Notices of Proposed Adjustment ("NOPAs") and other contingencies. We note that no payment of the additional amounts assessed by Irish Revenue pursuant to the NoA or proposed by the IRS in the NOPAs is currently required, and no such payment is expected to be required, unless and until a final determination of the matter is reached that is adverse to us, which could take several years in either case (refer to Item 8. Note 15 for additional information on the NoA and NOPAs). Based on our current financial condition and credit relationships,the foregoing, management believes that our operations and borrowing resources are sufficient to provide for our currentshort-term and foreseeablelong-term capital requirements.requirements, as described below. However, an adverse result with respect to our appeal of any material outstanding tax assessments or litigation, including securities or drug pricing matters, could ultimately require the use of corporate assets to pay such assessments, damages resulting from third-party claims, and related interest and/or penalties, and any such use of corporate assets would limit the assets available for other corporate purposes. As such, we continue to evaluate the impact of commercial and capital market conditionsthe above factors on liquidity and may determine that modifications to our capital structure are appropriate if market conditions deteriorate, or if favorable capital market opportunities become available.available, or any change in conditions relating to the NoA, the NOPAs or other contingencies have a material impact on our capital requirements.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Cash and Cash Equivalents
*Working capital represents current assets less current liabilities, excluding cash and cash equivalents and current indebtedness.
Cash, cash equivalents, cash flows from operations, and borrowings available under our credit facilities are expected to be sufficient to finance the known and/or foreseeableour liquidity and capital expenditures.expenditures in both the short and long term. Although our lenders have made commitments to make funds available to us in a timely fashion under our revolving credit agreements and overdraft facilities, if economic conditions worsen or new information becomes publicly available impacting the institutions’ credit rating or capital ratios, these lenders may be unable or unwilling to lend money pursuant to our existing credit facilities. Should our outlook on liquidity requirements change substantially from current projections, we may seek additional sources of liquidity in the future.
Cash Generated by (Used in) Operating Activities
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
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| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 | | Increase/(Decrease) |
Cash Flows From (For) Operating Activities | | | | | |
Net income (loss) | $ | (4,012.8 | ) | | $ | 119.6 |
| | $ | 4,132.4 |
|
Non-cash adjustments | 4,769.2 |
| | 683.2 |
| | (4,086.0 | ) |
Subtotal | 756.4 |
| | 802.8 |
| | 46.4 |
|
| | | | | |
Increase (decrease) in cash due to: | | | | | |
Accounts receivable | (0.6 | ) | | 3.2 |
| | 3.8 |
|
Inventories | 100.7 |
| | (16.0 | ) | | (116.7 | ) |
Accounts payable | (75.7 | ) | | (39.6 | ) | | 36.1 |
|
Payroll and related taxes | (41.1 | ) | | (27.4 | ) | | 13.7 |
|
Accrued customer programs | (13.9 | ) | | 34.6 |
| | 48.5 |
|
Accrued liabilities | (79.5 | ) | | (47.8 | ) | | 31.7 |
|
Accrued income taxes | 20.9 |
| | (6.1 | ) | | (27.0 | ) |
Other, net | (12.3 | ) | | (4.8 | ) | | 7.5 |
|
Subtotal | $ | (101.5 | ) | | $ | (103.9 | ) | | $ | (2.4 | ) |
| | | | | |
Net cash from operating activities | $ | 654.9 |
| | $ | 698.9 |
| | $ | 44.0 |
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Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
We generated $698.9Year Ended December 31, 2019 vs. December 31, 2018
The $205.2 million decrease in operating cash flow was due primarily to:
$161.7 million decrease in cash due to the change in accounts receivable due primarily to timing of sales and receipt of payments primarily in RX and CSCI, and our acquisition of Ranir;
$142.6 million decrease in cash due to prior year tax payments made in the current year, current year estimated tax payments, and an Israeli withholding tax payment; and
$74.1 million decrease in cash due to the change in accrued customer programs due primarily to pricing dynamics in our RX segment, as well as timing of rebate and chargeback payments; partially offset by
$88.9 million increase in cash due to the change in net earnings after adjustments for items such as deferred income taxes, impairment charges, restructuring charges, changes in our financial assets, share-based compensation, amortization of debt premium, gain on sale of business, and depreciation and amortization;
$36.0 million increase in cash due primarily to changes in operating leases and litigation related settlements;
$31.6 million decrease in the use of cash from operating activities duringprimarily due to the year ended December 31, 2017,continued build-up of inventory at a $44.0 million increase overlower level than in the prior year period,to support customer demands and improved supply management in our CSCA and CSCI segments, and increased volumes in CSCI due to new product launches; and
$30.8 million decrease in the use of cash due to the following:change in accrued payroll and related taxes due primarily to an increase in employee incentive compensation expense.
IncreasedYear Ended December 31, 2018 vs. December 31, 2017
The $105.9 million decrease in operating cash flow was due primarily to:
$190.4 million decrease in cash due to the change in net earnings after adjustments for items such as deferred income taxes, impairment charges, restructuring charges, changes in our financial assets, loss on extinguishment of debt, and depreciation and amortization; and
Changes$82.6 million decrease in accrued customer-related programscash due to the change in inventory due primarily to increased volumes and actions to improve customer service in our CSCA segment and increased volumes due to new product launches resulting in higher customer related-accruals, pricingand changing market dynamics in our RX segment; partially offset by
$68.4 million increase in cash due to the RX segment, as well as timing of rebate and chargeback payments;
Changeschange in accounts payable due primarily to changestiming of payments, mix of payment terms, and the absence of transactions related to the Omega accounts payable structure that occurredexited Russian business and prior year distribution phase out initiatives;
$74.2 million increase in cash due to the change in accrued income taxes due primarily to U.S. Federal tax obligation payments made in the prior year, period; andoffset by expected tax refunds;
| |
• | Changes in accrued liabilities due primarily to deferred revenue associated with BCH-Belgium distribution contracts and the absence of accruals related to the sale of our U.S. VMS business; partially offset by increased litigation accruals (refer to Item 8. Note 16), and fair market value adjustments related to contingent consideration (refer to Item 8. Note 6); offset partially by |
Changes$26.9 million increase in inventorycash due to the build up of inventory levels to support customer demands in the current period; offset by improved inventory management in the comparable prior year period; and
| |
• | Changes in accrued income taxes due primarily to Federal tax obligation payments made in the current year period, offset by expected tax refunds (refer to Item 8. Note 14). |
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | | | | | |
| Year Ended |
($ in millions) | December 31, 2015 | | December 31, 2016 | | Increase/ (Decrease) |
Cash Flows From (For) Operating Activities | | | | | |
Net loss | $ | (1.9 | ) | | $ | (4,012.8 | ) | | $ | (4,010.9 | ) |
Non-cash adjustments | 745.4 |
| | 4,769.2 |
| | 4,023.8 |
|
Subtotal | 743.5 |
| | 756.4 |
| | 12.9 |
|
| | | | | |
Increase (decrease) in cash due to: | | | | | |
Accounts receivable | 4.8 |
| | (0.6 | ) | | (5.4 | ) |
Inventories | (21.5 | ) | | 100.7 |
| | 122.2 |
|
Accounts payable | (26.7 | ) | | (75.7 | ) | | (49.0 | ) |
Payroll and related taxes | (42.0 | ) | | (41.1 | ) | | 0.9 |
|
Accrued customer programs | 53.9 |
| | (13.9 | ) | | (67.8 | ) |
Accrued liabilities | 98.9 |
| | (79.5 | ) | | (178.4 | ) |
Accrued income taxes | (67.9 | ) | | 20.9 |
| | 88.8 |
|
Other, net | 21.3 |
| | (12.3 | ) | | (33.6 | ) |
Subtotal | $ | 20.8 |
| | $ | (101.5 | ) | | $ | (122.3 | ) |
| | | | | |
Net cash from operating activities | $ | 764.3 |
| | $ | 654.9 |
| | $ | (109.4 | ) |
We generated $654.9 million of cash from operating activities during the year ended December 31, 2016, a $109.4 million decrease over the prior year, due primarily to the following:
Changeschange in accrued liabilities due primarily to paymentthe change in royalty and profit sharing accruals; and
$17.8 million increase in cash due to the change in accounts receivable due primarily to the discontinuation of legal expenses associated with the Mylan defense which were accrued at December 31, 2015, deferred revenue associated with the BCHour Belgium Distribution Contracts, andaccounts receivable factoring program, more than offset by timing of payments;sales and receipt of payments in our CSCA and RX segments.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Changes in accrued customer-related programs due to the pricing dynamics in the RX segment; and
Cash Generated by (Used in) Investing ActivitiesChanges in accounts payable due to changes to the Omega accounts payable structure as discussed below; offset partially by
Changes in inventories due to improved inventory management in our CHCI and CHCA segments and increased sales of cough/cold products at the end of the year endedYear Ended December 31, 2016; and
2019 vs. December 31, 2018
The $469.3 million decrease in investing cash flow was due primarily to:
| |
• | Changes$747.7 million decrease in accrued income taxes due primarily tocash used for the prior year including a $68.9 million incremental tax payment made in connection with the contested IRS auditacquisition of Ranir (refer to Item 8. Note 143).; |
| |
• | $113.5 million decrease in cash used for other acquisitions, primarily for the branded OTC rights to Prevacid®24HR for $61.7 million, an ANDA for a generic gel product for $49.0 million, an ANDA for a generic product used to relieve pain for $15.7 million, and Budesonide Nasal Spray and Triamcinolone Nasal Sprayfor $14.0 million, partially offset by the absence of $35.6 million of prior year acquisitions primarily related to an ANDA for a generic topical cream (refer to Item 8. Note 3); and |
In addition, increased net earnings after adjusting for non-cash items such as impairment charges, loss on extinguishment of debt, changes in our financial assets, and depreciation and amortization contributed to an increase in operating cash flow.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | | | | | |
| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 | | Increase / (Decrease) |
Cash Flows From (For) Operating Activities | | | | | |
Net income | $ | 180.6 |
| | $ | 42.5 |
| | $ | (138.1 | ) |
Non-cash adjustments | 88.6 |
| | 279.2 |
| | 190.6 |
|
Subtotal | 269.2 |
| | 321.7 |
| | 52.5 |
|
| | | | | |
Increase (decrease) in cash due to: | | | | | |
Accounts receivable | (3.4 | ) | | 52.5 |
| | 55.9 |
|
Inventories | (19.4 | ) | | (29.6 | ) | | (10.2 | ) |
Accounts payable | (46.8 | ) | | (194.1 | ) | | (147.3 | ) |
Payroll and related taxes | (26.3 | ) | | (38.2 | ) | | (11.9 | ) |
Accrued customer programs | 51.8 |
| | 34.4 |
| | (17.4 | ) |
Accrued liabilities | 52.1 |
| | 108.1 |
| | 56.0 |
|
Accrued income taxes | 33.1 |
| | (56.8 | ) | | (89.9 | ) |
Other, net | (18.3 | ) | | 2.9 |
| | 21.2 |
|
Subtotal | $ | 22.8 |
| | $ | (120.8 | ) | | $ | (143.6 | ) |
| | | | | |
Net cash from operating activities | $ | 292.0 |
| | $ | 200.9 |
| | $ | (91.1 | ) |
We generated $200.9 million of cash from operating activities during the six months ended December 31, 2015, a $91.1$35.1 million decrease over the comparable prior year period, duein cash used for capital spending, primarily to the following:
Changes in accounts payable due primarily to the addition of Omega as well as changes to the Omega accounts payable structure as discussed below;increase tablet and
infant formula capacity and quality/regulation projects; partially offset by
| |
• | Changes in accrued income taxes due primarily$250.0 million receipt of the Royalty Pharma contingent milestone proceeds(refer to a $68.9 million incremental tax payment made in connection with the contested IRS audit (refer to Item 8. Note 147); offset partially byand |
| |
• | $177.3 million in proceeds received from divestitures, primarily from our animal health business (refer to Item 8. Note 3). |
Changes in accrued liabilities due primarily to amounts not yet paid related to our defense against Mylan;
Changes in accounts receivable due to timing of receipt of payments; and
Increased net earnings after adjusting for non-cash items such as impairment charges, changes in our financial assets, and depreciation and amortization.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
In addition, our operating cash flow was negatively impacted by $57.7 million in legal and consulting fees related to our defense against Mylan.
Due to the acquisition of Omega on March 30, 2015, our CHCI segment experienced strong operating cash inflow in the second quarter of 2015 and cash outflow in the third quarter of 2015 primarily due to accounts payable payment structures with suppliers that increased the days outstanding in the second and fourth quarter compared to the first and third quarters. In order to establish a more sustainable cash flow pattern during the calendar year, in the fourth quarter of 2015 and continuing into the first quarter of 2016, we implemented a program to standardize these payment terms such that the days outstanding will largely be consistent each reporting period. This program had an unfavorable impact on accounts payable and operating cash flow in these quarters.
Investing Activities
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | | | | | |
| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 | | Increase/(Decrease) |
Cash Flows From (For) Investing Activities |
Proceeds from royalty rights | $ | 353.7 |
| | $ | 87.3 |
| | $ | (266.4 | ) |
Acquisitions of businesses, net of cash acquired | (427.4 | ) | | (0.4 | ) | | $ | 427.0 |
|
Asset acquisitions | (65.1 | ) | | — |
| | $ | 65.1 |
|
Proceeds from sale of securities | 4.5 |
| | — |
| | $ | (4.5 | ) |
Additions to property, plant and equipment | (106.2 | ) | | (88.6 | ) | | $ | 17.6 |
|
Net proceeds from sale of business and other assets | 69.1 |
| | 154.6 |
| | $ | 85.5 |
|
Proceeds from sale of the Tysabri® financial asset | — |
| | 2,200.0 |
| | $ | 2,200.0 |
|
Other investing, net | (3.6 | ) | | (14.8 | ) | | $ | (11.2 | ) |
Net cash from (for) investing activities | $ | (175.0 | ) | | $ | 2,338.1 |
| | $ | 2,513.1 |
|
Cash generated from investing activities totaled $2.3 billion for the year ended December 31, 2017, compared to cash used of $175.0 million in the prior year. The inflow in the current year was due primarily to the completed divestment of our Tysabri® financial asset to Royalty Pharma, for which we received $2.2 billion in cash at closing (refer toItem 8. Note 6). In addition, we received $154.6 million in cash primarily related to the sale of our Israel API business (refer toItem 8. Note 2). The outflow in the prior year was due primarily to the acquisition of a portfolio of generic dosage forms and strengths of Retin-A® ("Tretinoin"), a topical prescription acne treatment from Mattawan Pharmaceuticals, LLC, and the Generic Benzaclin™ product rights, which used $478.4 million in cash. The outflow was offset partially by proceeds from royalty rights of $353.7 million.
Cash used for capital expenditures totaled $88.6 million during the year ended December 31, 2017 compared to $106.2 million in the prior year. The decrease in cash used for capital expenditures was due primarily to the decrease in the number of manufacturing projects in the current year compared to the prior year. Capital expenditures for the next twelve months are anticipated to be between $90.0$175.0 million and $115.0$225.0 million related to manufacturing productivity and efficiency initiatives, increased tablet and infant formula capacity and quality/regulatory projects. We expect to fund these estimated capital expenditures with funds from operating cash flows.
Year Ended December 31, 2018 vs. December 31, 2017
The $2.5 billion decrease in investing cash flow was due primarily to:
| |
• | $2.2 billion absence of proceeds from the 2017 divestment of our Tysabri® financial asset to Royalty Pharma; |
$149.4 million absence of 2017 net proceeds from sale of business and other assets;
$73.6 million decrease in proceeds from royalty rights; and
$35.6 million decrease in cash due primarily to the acquisition of an ANDA for a generic topical cream.
Cash used for capital expenditures totaled $102.6 million during the year ended December 31, 2018 compared to $88.6 million in the prior year. The increase in cash used for capital expenditures was due primarily to the increase in the number of manufacturing projects in the current year compared to the prior year.
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Cash Generated by (Used in) Financing Activities
Year Ended December 31, 20162019 vs.Year Ended December 31, 20152018
The $573.7 million increase in financing cash flow was due primarily to: |
| | | | | | | | | | | |
| Year Ended |
($ in millions) | December 31, 2015 | | December 31, 2016 | | Increase/ (Decrease) |
Cash Flows From (For) Investing Activities |
Proceeds from royalty rights | $ | 335.1 |
| | $ | 353.7 |
| | $ | 18.6 |
|
Acquisitions of businesses, net of cash acquired | (2,886.4 | ) | | (427.4 | ) | | 2,459.0 |
|
Asset acquisitions | (4.0 | ) | | (65.1 | ) | | (61.1 | ) |
Settlement of acquisition-related foreign currency derivatives | (304.8 | ) | | — |
| | 304.8 |
|
Proceeds from sale of securities | — |
| | 4.5 |
| | 4.5 |
|
Additions to property, plant and equipment | (166.8 | ) | | (106.2 | ) | | 60.6 |
|
Proceeds from sale of business | — |
| | 69.1 |
| | 69.1 |
|
Other investing, net | (2.7 | ) | | (3.6 | ) | | (0.9 | ) |
Net cash from (for) investing activities | $ | (3,029.6 | ) | | $ | (175.0 | ) | | $ | 2,854.6 |
|
$400.0 million absence in share repurchases;
Cash used for investing activities totaled $175.0$169.0 million increase due to the issuance of long-term debt in our $600.0 million refinance of the 2018 Term Loan in the current period, offset by the absence of our $431.0 million refinance of the 2014 Term Loan; and
$4.9 million increase in the change in net borrowings (repayments) of revolving credit agreements and other financing; and
$6.5 million decrease in payments on long-term debt; partially offset by
| |
• | $7.5 million increase in dividend payments. |
Year Ended December 31, 2018 vs. December 31, 2017
The $2.4 billion increase in financing cash flow was due primarily to:
$2.1 billion and $116.1 million decrease due to payments on long-term debt and premium on early debt retirement, respectively, related to debt extinguishment in 2017; and
$431.0 million increase in issuance of long-term debt in 2018; partially offset by
$208.5 million increase in share repurchases.
Share Repurchases
In October 2018, our Board of Directors authorized up to $1.0 billion of share repurchases with no expiration date, subject to the Board of Directors’ approval of the pricing parameters and amount that may be repurchased under each specific share repurchase program. Share repurchases were $0.0 million, $400.0 million, and $191.5 million for the
yearyears ended December 31,
2016, a $2.9 billion decrease over the prior year. The outflow in the year ended2019, December 31,
2016 was due primarily to the acquisitions of the Tretinoin Products2018, and
the Generic Benzaclin™ product rights, which used $478.4 million in cash, offset partially by $353.7 million of proceeds from royalty rights. The outflow in the prior year was due primarily to $2.9 billion used for business acquisitions, most notably Omega, as well as $304.8 million related to the cash settlement of the non-designated foreign currency derivatives we used to hedge the euro-denominated Omega and GSK Products purchase prices. See Item 8. Note 2 and Item 8. Note 8 for more information on the above-mentioned acquisitions and derivatives, respectively.
Cash used for capital expenditures totaled $106.2 million during year ended December 31, 2016 compared to $166.8 million in the prior year. The decrease in capital expenditures over the prior year was due primarily to several large infrastructure projects nearing completion.2017, respectively.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | | | | | |
| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 | | Increase / (Decrease) |
Cash Flows From (For) Investing Activities |
Proceeds from royalty rights | $ | 175.8 |
| | $ | 166.3 |
| | $ | (9.5 | ) |
Acquisitions of businesses, net of cash acquired | (83.0 | ) | | (791.6 | ) | | $ | (708.6 | ) |
Settlement of acquisition-related foreign currency derivatives | (26.4 | ) | | (1.3 | ) | | $ | 25.1 |
|
Additions to property, plant and equipment | (48.0 | ) | | (77.8 | ) | | $ | (29.8 | ) |
Other investing, net | 0.8 |
| | (3.7 | ) | | $ | (4.5 | ) |
Net cash from (for) investing activities | $ | 19.2 |
| | $ | (708.1 | ) | | $ | (727.3 | ) |
Cash used for investing activities totaled $708.1 million for the six months ended December 31, 2015, compared to cash from investing activities of $19.2 million in the prior year period. The cash outflow for the six months ended December 31, 2015 was to complete the Entocort®, GSK and Naturwohl acquisitions, offset partially by proceeds from royalty rights of $166.3 million. During the six months ended December 27, 2014, we used $83.0 million in cash to complete the Lumara products acquisition, and $26.4 million to hedge the euro-denominated Omega purchase price, and received $175.8 million in proceeds from royalty rights (refer to Item 8. Note 2 and Item 8. Note 8 for more information on the above-mentioned acquisitions and derivatives, respectively). Capital expenditures for the six months ended December 31, 2015 totaled $77.8 million, compared to $48.0 million in the comparable prior year period.Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Financing Activities
Year Ended December 31, 2017 vs. Year Ended December 31, 2016
|
| | | | | | | | | | | |
| Year Ended |
($ in millions) | December 31, 2016 | | December 31, 2017 | | Increase/(Decrease) |
Cash Flows From (For) Financing Activities |
Issuances of long-term debt | $ | 1,190.3 |
| | $ | — |
| | $ | (1,190.3 | ) |
Borrowings (repayments) of revolving credit agreements and other financing, net | (802.5 | ) | | 6.8 |
| | 809.3 |
|
Payments on long-term debt | (559.2 | ) | | (2,611.0 | ) | | (2,051.8 | ) |
Deferred financing fees | (2.8 | ) | | (4.8 | ) | | (2.0 | ) |
Premium on early debt retirement | (0.6 | ) | | (116.1 | ) | | (115.5 | ) |
Issuance of ordinary shares | 8.3 |
| | 0.7 |
| | (7.6 | ) |
Equity issuance costs | (10.3 | ) | | — |
| | 10.3 |
|
Repurchase of ordinary shares | — |
| | (191.5 | ) | | (191.5 | ) |
Cash dividends | (83.2 | ) | | (91.1 | ) | | (7.9 | ) |
Other financing, net | (8.7 | ) | | 2.3 |
| | 11.0 |
|
Net cash for financing activities | $ | (268.7 | ) | | $ | (3,004.7 | ) | | $ | (2,736.0 | ) |
Cash used for financing activities totaled $3.0 billion for the year ended December 31, 2017, compared to $268.7 million of cash used for financing activities for the prior year. In the current year, cash used for financing included $2.6 billion of repayments on long-term debt, $116.1 million of premium on early debt retirement related to the current year debt extinguishment and $191.5 million in share repurchases, as discussed below. In the prior year, the cash used for financing activities was due primarily to borrowings of $1.2 billion of long-term debt, more than offset by net repayments on our revolving credit agreements and other short-term financing of $802.5 million and net repayments on our long-term debt of $559.2 million.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
|
| | | | | | | | | | | |
| Year Ended |
($ in millions) | December 31, 2015 | | December 31, 2016 | | Increase / (Decrease) |
Cash Flows From (For) Financing Activities | | | | | |
Borrowings (repayments) of revolving credit agreements and other financing, net | $ | 666.0 |
| | $ | (802.5 | ) | | $ | (1,468.5 | ) |
Issuances of long-term debt | — |
| | 1,190.3 |
| | 1,190.3 |
|
Payments on long-term debt | (917.3 | ) | | (559.2 | ) | | 358.1 |
|
Premium on early debt retirement | — |
| | (0.6 | ) | | (0.6 | ) |
Deferred financing fees | (3.6 | ) | | (2.8 | ) | | 0.8 |
|
Issuance of ordinary shares | 8.9 |
| | 8.3 |
| | (0.6 | ) |
Equity issuance costs | — |
| | (10.3 | ) | | (10.3 | ) |
Repurchase of ordinary shares | (500.0 | ) | | — |
| | 500.0 |
|
Cash dividends | (72.2 | ) | | (83.2 | ) | | (11.0 | ) |
Other financing, net | (19.0 | ) | | (8.7 | ) | | 10.3 |
|
Net cash from (for) financing activities | $ | (837.2 | ) | | $ | (268.7 | ) | | $ | 568.5 |
|
Cash used for financing activities totaled $268.7 million for the year ended December 31, 2016, compared to $837.2 million for the prior year. In the year ended December 31, 2016, cash used for financing included $802.5 million to repay balances outstanding under our revolving credit agreements and other short-term financing, $500.0 million used to prepay our 1.300% 2016 Notes, and $59.2 million in scheduled debt payments. These
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
payments were offset by the borrowing of $1.2 billion of long-term debt. In the year ended December 31, 2015, the cash used for financing activities was due primarily to payments of $917.3 million on long-term debt, which included the repayment of debt assumed from Omega and a $300.0 million legacy Perrigo term loan, and $500.0 million used to repurchase shares under our share purchase plan. This was offset by $666.0 million of net borrowings under our revolving credit facilities and other short term borrowings.
Six Months Ended December 31, 2015 vs. Six Months Ended December 27, 2014
|
| | | | | | | | | | | |
| Six Months Ended |
($ in millions) | December 27, 2014 | | December 31, 2015 | | Increase / (Decrease) |
Cash Flows From (For) Financing Activities |
Issuances of long-term debt | $ | 2,504.3 |
| | $ | — |
| | $ | (2,504.3 | ) |
Borrowings (repayments) of revolving credit agreements and other financing, net | (2.1 | ) | | 718.0 |
| | $ | 720.1 |
|
Payments on long-term debt | (934.5 | ) | | (28.3 | ) | | $ | 906.2 |
|
Deferred financing fees | (24.8 | ) | | (0.3 | ) | | $ | 24.5 |
|
Issuance of ordinary shares | 1,039.5 |
| | 4.9 |
| | $ | (1,034.6 | ) |
Equity issuance costs | (35.7 | ) | | — |
| | $ | 35.7 |
|
Repurchase of ordinary shares | — |
| | (500.0 | ) | | $ | (500.0 | ) |
Cash dividends | (29.0 | ) | | (36.3 | ) | | $ | (7.3 | ) |
Other financing, net | (8.8 | ) | | (8.4 | ) | | $ | 0.4 |
|
Net cash from financing activities | $ | 2,508.9 |
| | $ | 149.6 |
| | $ | (2,359.3 | ) |
Cash generated from financing activities totaled $149.6 million for the six months ended December 31,
2015, compared to $2.5 billion for the comparable prior year period. The net cash inflow during the six months
ended December 31, 2015 was due to net borrowings under our revolving credit facilities of $680.0 million and net
borrowings under our overdraft facilities and other short term borrowings of $38.0 million, offset partially by $500.0 million used to repurchase shares under our share repurchase plan, $36.3 million in dividend payments, and $28.3 million in scheduled principal payments on our euro-denominated term loan. The cash generated during the six months ended December 27, 2014 was due to financing activities to fund the Omega acquisition. The Omega financing included raising $1.6 billion of debt, net of discount and issuance costs, and issuing 6.8 million ordinary shares, which raised $999.3 million, net of issuance costs. In addition, we refinanced certain of our debt totaling $907.6 million.
Share Repurchases
In October 2015, the Board of Directors approved a three-year share repurchase plan of up to $2.0 billion. During the year ended December 31, 2017, we repurchased 2.7 million ordinary shares at an average repurchase price of $71.72 per share, for a total of $191.5 million. We did not repurchase any shares under the share repurchase plan during the year ended December 31, 2016. During the six months ended December 31, 2015, we repurchased 3.3 million ordinary shares at an average repurchase price of $151.59 per share, for a total of $500.0 million.
Dividends
In January 2003, the Board of Directors adopted a policy of paying quarterly dividends. We paid dividends as follows:
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
|
| | | | | | | | | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
Dividends paid (in millions) | $ | 112.4 |
| | $ | 104.9 |
| | $ | 91.1 |
|
Dividends paid per share | $ | 0.82 |
| | $ | 0.76 |
| | $ | 0.64 |
|
|
| | | | | | | | | | | | | | | |
| Six Months Ended | | Year Ended |
| December 27, 2014 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
Dividends paid (in millions) | $ | 29.0 |
| | $ | 36.3 |
| | $ | 83.2 |
| | $ | 91.1 |
|
Dividends paid per share | $ | 0.21 |
| | $ | 0.25 |
| | $ | 0.58 |
| | $ | 0.64 |
|
The declaration and payment of dividends, if any, is subject to the discretion of our Board of Directors and will depend on our earnings, financial condition, availability of distributable reserves, capital and surplus requirements, and other factors our Board of Directors may consider relevant.
Dividends paid were as follows:
|
| | | | | | | | |
Declaration Date | | Record Date | | Payable | | Dividend Declared |
| | | | | | |
Year Ended December 31, 2017 |
November 2, 2017 | | December 1, 2017 | | December 19, 2017 | | $ | 0.160 |
|
August 8, 2017 | | August 25, 2017 | | September 12, 2017 | | $ | 0.160 |
|
May 3, 2017 | | May 26, 2017 | | June 13, 2017 | | $ | 0.160 |
|
February 21, 2017 | | March 3, 2017 | | March 21, 2016 | | $ | 0.160 |
|
| | | | | | |
Year Ended December 31, 2016 |
November 8, 2016 | | November 25, 2016 | | December 13, 2016 | | $ | 0.145 |
|
August 2, 2016 | | August 26, 2016 | | September 13, 2016 | | $ | 0.145 |
|
April 26, 2016 | | May 27, 2016 | | June 14, 2016 | | $ | 0.145 |
|
February 16, 2016 | | February 26, 2016 | | March 15, 2016 | | $ | 0.145 |
|
| | | | | | |
Six Months Ended December 31, 2015 |
November 4, 2015 | | November 27, 2015 | | December 15, 2015 | | $ | 0.125 |
|
August 12, 2015 | | August 28, 2015 | | September 15, 2015 | | $ | 0.125 |
|
Borrowings and Capital Resources
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
Overdraft Facilities
We have overdraft facilities available that we use to support our cash management operations. We report any balances outstanding in "Other Financing" in Item 8,8. Note 1011. The balanceThere were no borrowings outstanding under the facilities was $6.9 million and $82.9 million atas of December 31, 2017 and2019 or December 31, 2015, respectively,2018.
Leases
We had $158.2 million of lease liabilities and there were no balances outstanding under the facilities at$157.5 million of lease assets as of December 31, 2016.2019.
On March 30, 2015, we assumed and repaid certain overdraft facilities totaling €51.4 million ($56.0 million) with the Omega acquisition.
Accounts Receivable Factoring
We have accounts receivable factoring arrangements with non-related third-party financial institutions (the “Factors”). Pursuant to the terms of the arrangements, we sell to the Factors certain of our accounts receivable balances on a non-recourse basis for credit approved accounts. An administrative fee per invoice is charged on the gross amount of accounts receivables assigned to the Factors, and interest is calculated at the applicable EUR LIBOR rate plus a spread. The total amount factored on a non-recourse basis and excluded from accounts receivable was $27.5 million, $50.7$10.0 million and $64.5$24.3 million at December 31, 2017, December 31, 20162019 and December 31, 2015,2018, respectively.
Revolving Credit Agreements
On March 8, 2018, we terminated the revolving credit agreement entered into in December 9, 2015, our 100% owned finance subsidiary, Perrigo Finance Unlimited Company (formerly Perrigo Finance plc) ("Perrigo Finance"),2014 and entered into a $750.0 million$1.0 billion revolving credit agreement maturing on March 8, 2023 (the "2015"2018 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $750.0 million then outstanding under the 2015 Revolver and terminated the facility.
On March 30, 2015, we assumed a revolving credit facility with €500.0 million ($544.5 million) outstanding from Omega. On April 8, 2015, we repaid the €500.0 million ($539.1 million) outstanding under the assumed revolving credit facility and terminated the facility.
On December 5, 2014, Perrigo Finance entered into a $600.0 million revolving credit agreement, which increased to $1.0 billion on March 30, 2015 (the "2014 Revolver"). On March 15, 2016, we used the proceeds of the long-term debt issuance described below under "2016 Notes" to repay the $435.0 million then outstanding under the 2014 Revolver. There were no borrowings outstanding under the 20142018 Revolver as ofDecember 31, 20172019 or December 31, 2016.
Term Loans, Notes and Bonds
2018.
We had $2.9 billion, $5.4 billion, and $4.7 billion outstanding under our notes and bonds, and $420.0 million,$420.7 million, and $488.8 million outstanding under our term loan, as of December 31, 2017, December 31, 2016, and December 31, 2015, respectively. On September 29, 2016, we repaid the 1.300% senior notes due 2016 in full.
On March 7, 2016, Perrigo Finance issued $500.0 million in aggregate principal amount of 3.500% senior notes due 2021 and $700.0 million in aggregate principal amount of 4.375% senior notes due 2026 (together, the "2016 Notes") and received net proceeds of $1.2 billion after fees and market discount, which were used to repay the amounts outstanding under the 2015 Revolver and 2014 Revolver mentioned above.
On September 2, 2014, we offered to exchange what were previously private placement senior notes for public bonds registered with the Securities and Exchange Commission. Substantially all of the private placement senior notes have been exchanged.
On December 2, 2014, Perrigo Finance, our 100% owned finance subsidiary, issued $500.0 million in aggregate principal amount of 3.50% senior notes due 2021, $700.0 million in aggregate principal amount of 3.90% senior notes due 2024, and $400.0 million in aggregate principal amount of 4.90% senior notes due 2044 (collectively, the "2014 Bonds").
The 2014 Bonds are fully and unconditionally guaranteed on a senior unsecured basis by Perrigo Company
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
plc, and no other subsidiary of Perrigo Company plc guarantees the 2014 Bonds. We may redeem the 2014 Bonds at any time under the terms of the applicable indenture, subject to the payment of a make-whole premium.
On December 5, 2014, Perrigo Finance entered into a term loan agreement consisting of a €500.0 million ($614.3 million) tranche, with the ability to draw an additional €300.0 million ($368.6 million) tranche, maturing December 5, 2019, and we entered into a $300.0 million term loan tranche maturing December 18, 2015, which we repaid in full on June 25, 2015.
On December 5, 2014, we repaid the remaining $895.0 million outstanding under our 2013 Term Loan described below, then terminated it.
On June 24, 2015, we repaid the $300.0 million portion of the 2014 Term Loan.
On March 30, 2015, we assumed $20.0 million in aggregate principal amount of 6.19% senior notes due 2016 (the "2016 Notes"), €135.0 million ($147.0 million) aggregate principal amount of 5.1045% senior notes due 2023, €300.0 million ($326.7 million) in aggregate principal amount of 5.125% retail bonds due 2017, €180.0 million ($196.0 million) in aggregate principal amount of 4.500% retail bonds due 2017, and €120.0 million ($130.7 million) in aggregate principal amount of 5.000% retail bonds due 2019 (collectively, the "Retail Bonds") in connection with the Omega acquisition.
The fair value of the 2023Loans, Notes and Retail Bondsexceeded par value by €93.6 million($101.9 million) on the date of the acquisition. As a result, a fair value adjustment was recorded
Total Term Loans, Notes and Bonds outstanding are summarized as part of the carrying value of the underlying debt and will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments. The adjustment does not affect cash interest payments.follows (in millions):
On May 29, 2015, we repaid the $20.0 million in aggregate principal amount of the 2016 Notes. |
| | | | | | | | | |
| | | Year Ended |
| | | December 31, 2019 | | December 31, 2018 |
Term loan | | | |
* | 2018 Term loan due March 8, 2020 | $ | — |
| | $ | 351.3 |
|
| 2019 Term loan due August 15, 2022 | 600.0 |
| | — |
|
| Total term loans | 600.0 |
| | 351.3 |
|
| | | | | |
Notes and bonds | | | |
| Coupon | Due | | | |
* | 5.000% | May 23, 2019 | — |
| | 137.6 |
|
| 3.500% | March 15, 2021 | 280.4 |
| | 280.4 |
|
| 3.500% | December 15, 2021 | 309.6 |
| | 309.6 |
|
* | 5.105% | July 28, 2023 | 151.4 |
| | 154.9 |
|
| 4.000% | November 15, 2023 | 215.6 |
| | 215.6 |
|
| 3.900% | December 15, 2024 | 700.0 |
| | 700.0 |
|
| 4.375% | March 15, 2026 | 700.0 |
| | 700.0 |
|
| 5.300% | November 15, 2043 | 90.5 |
| | 90.5 |
|
| 4.900% | December 15, 2044 | 303.9 |
| | 303.9 |
|
| Total notes and bonds | $ | 2,751.4 |
| | $ | 2,892.5 |
|
| |
* | Debt denominated in euros subject to fluctuations in the euro-to-U.S. dollar exchange rate. |
Debt Repayments and Related Extinguishment During the Year Ended December 31, 2017
During the year ended December 31, 2017,2019, we reduced our outstanding debt through a variety of transactions (in millions):
|
| | | | | | | | |
Date | | Series | | Transaction Type | | Principal Retired |
April 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | $ | 13.3 |
|
May 8, 2017 | | $600.0 2.300% senior notes due 2018 | | Early redemption | | 600.0 |
|
May 23, 2017 | | €180.0 4.500% retail bonds due 2017 | | Scheduled maturity | | 201.3 |
|
June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 190.4 |
|
June 15, 2017 | | $500.0 3.500% senior notes due 2021 | | Tender offer | | 219.6 |
|
June 15, 2017 | | $800.0 4.000% senior notes due 2023 | | Tender offer | | 584.4 |
|
June 15, 2017 | | $400.0 5.300% senior notes due 2043 | | Tender offer | | 309.5 |
|
June 15, 2017 | | $400.0 4.900% senior notes due 2044 | | Tender offer | | 96.1 |
|
July 1, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.3 |
|
September 30, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 14.8 |
|
December 12, 2017 | | €300.0 5.125% senior notes due 2017 | | Scheduled maturity | | 352.3 |
|
December 31, 2017 | | 2014 term loan due December 5, 2019 | | Scheduled quarterly payment | | 15.0 |
|
| | | | | | $ | 2,611.0 |
|
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
As a result ofmade $24.7 million in scheduled principal payments. In connection with the of the early redemption and tender offer transactions discussed above, we recorded a loss of $135.2 million during the three months ended July 1, 2017 in Loss on extinguishment of debt (in millions):
|
| | | | |
Premium on debt repayment | | $ | 116.1 |
|
Transaction costs | | 3.8 |
|
Write-off of deferred financing fees | | 10.6 |
|
Write-off of remaining discount on bond | | 4.7 |
|
Total loss on extinguishment of debt | | $ | 135.2 |
|
We entered into amendmentsOmega acquisition, on March 16, 2017 related to30, 2015, we assumed a 5.000% retail bond due 2019 in the 2014 Revolver andamount of €120.0 million ($130.7 million). On May 23, 2019 we repaid the 2014bond in full. On August 15, 2019, we refinanced the €284.4 million ($317.1 million) outstanding under the 2018 Term Loan providing for additional time to deliver certain financial statements, as well aswith the modificationproceeds of certain financial and other covenants. We also entered into additional amendments toa new $600.0 million term loan (the "2019 Term Loan"), maturing on August 15, 2022. During the 2014 Revolver and the 2014 Term Loan on April 25, 2017 to modify provisions of such agreements necessary as a result of the correctionyear ended December 31, 2018, we made $51.5 million in accounting related to the Tysabri® financial asset, as well as waivers of any default or event of default that may arise from any restatement of or deficiencies in our financial statements for the periods specified in such amendments and waivers. No default or event of default existed prior to entering into these amendments and waivers. scheduled principal payments.
We are in compliance with all covenants under our debt agreements as of December 31, 2017.
See 2019 (refer to Item 1. 8. Note 11 and Note 10 for more information on all of the above debt facilities.facilities and lease activity, respectively).
Credit Ratings
Our credit ratings on December 31, 20172019 were Baa3 (stable) and BBB- (stable) by Moody's Investors Service and Standard and Poor's Rating Services,S&P Global Ratings, respectively.
Credit rating agencies review their ratings periodically and, therefore, the credit rating assigned to us by each agency may be subject to revision at any time. Accordingly, we are not able to predict whether current credit ratings will remain as disclosed above. Factors that can affect our credit ratings include changes in operating performance, the economic environment, our financial position, and changes in business strategy. If changes in our credit ratings were to occur, they could impact, among other things, future borrowing costs, access to capital markets, and vendor financing terms.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into R&D arrangements with third parties that often require milestone payments to the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the product. Because of the contingent nature of these payments, they are not included in our table of contractual obligations below.
Contractual Obligations
Our enforceable and legally binding obligations as of December 31, 20172019 are set forth in the following table. Some of the amounts included in this table are based on management’s estimates and assumptions about these obligations, including the duration, the possibility of renewal, anticipated actions by third parties and other factors. Because these estimates and assumptions are necessarily subjective, the enforceable and legally binding obligations actually paid in future periods may vary from the amounts reflected in the table (in millions).:
| | | Payment Due | Payment Due |
| 2018 | | 2019-2020 | | 2021-2022 | | After 2022 | | Total | 2020 | | 2021-2022 | | 2023-2024 | | After 2024 | | Total |
Short and long-term debt (1) | $ | 198.3 |
| | $ | 746.9 |
| | $ | 791.9 |
| | $ | 2,767.8 |
| | $ | 4,504.9 |
| $ | 128.1 |
| | $ | 1,412.8 |
| | $ | 1,237.2 |
| | $ | 1,519.5 |
| | $ | 4,297.6 |
|
Capital lease obligations | 0.8 |
| | 1.4 |
| | — |
| | — |
| | 2.2 |
| 4.1 |
| | 8.1 |
| | 3.0 |
| | 14.2 |
| | 29.4 |
|
Purchase obligations (2) | 757.2 |
| | 13.7 |
| | 0.1 |
| | — |
| | 771.0 |
| 824.1 |
| | 21.5 |
| | 0.3 |
| | — |
| | 845.9 |
|
Operating leases (3) | 38.1 |
| | 56.2 |
| | 32.3 |
| | 16.6 |
| | 143.2 |
| 37.2 |
| | 47.6 |
| | 26.9 |
| | 41.5 |
| | 153.2 |
|
Other contractual liabilities reflected on the consolidated balance sheets: | | | | | | | | | | | | | | | | | | |
Deferred compensation and benefits (4) | — |
| | — |
| | — |
| | 92.1 |
| | 92.1 |
| — |
| | — |
| | — |
| | 104.8 |
| | 104.8 |
|
Other (5) | 90.0 |
| | 6.6 |
| | 4.9 |
| | 1.5 |
| | 103.0 |
| 50.4 |
| | 6.6 |
| | 1.8 |
| | — |
| | 58.8 |
|
Total | $ | 1,084.4 |
| | $ | 824.8 |
| | $ | 829.2 |
| | $ | 2,878.0 |
| | $ | 5,616.4 |
| $ | 1,043.9 |
| | $ | 1,496.6 |
| | $ | 1,269.2 |
| | $ | 1,680.0 |
| | $ | 5,489.7 |
|
| |
(1) | Short-term and long-term debt includes interest payments, which were calculated using the effective interest rate at December 31, 2017.2019. |
| |
(2) | Consists of commitments for both materials and services. |
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
| |
(3) | Used in normal course of business, principally for warehouse facilities and computer equipment. |
| |
(4) | Includes amounts associated with non-qualified plans related to deferred compensation, executive retention and post employment benefits. Of this amount, we have funded $34.6$34.4 million, which is recorded in Other non-current assets on the balance sheet. These amounts are assumed payable after five years, although certain circumstances, such as termination, would require earlier payment. |
| |
(5) | Primarily includes consulting fees, legal settlements, contingent consideration obligations, restructuring accruals, insurance obligations, and electrical and gas purchase contracts, which were accrued in Other current liabilities and Other non-current liabilities at December 31, 20172019 for all years. |
We fund our U.S. qualified profit-sharing and investment plan in accordance with the Employee Retirement Income Security Act of 1974 regulations for the minimum annual required contribution and Internal Revenue Service regulations for the maximum annual allowable tax deduction. We are committed to making the required minimum contributions, which we expect to be approximately $25.9$24.8 million over the next 12 months. Future contributions are dependent upon various factors, including employees’ eligible compensation, plan participation and changes, if any, to current funding requirements. Therefore, no amounts were included in the Contractual Obligations table above. We generally expect to fund all future contributions with cash flows from operating activities.
As of December 31, 2017,2019, we had approximately $501.7$448.6 million of liabilities for uncertain tax positions.positions, including interest and penalties. These unrecognized tax benefits have been excluded from the Contractual Obligations table above due to uncertainty as to the amounts and timing of settlement with taxing authorities.
Net deferred income tax liabilities were $311.5$275.2 million as of December 31, 2017.2019. This amount is not included in the Contractual Obligations table above because we believe this presentation would not be meaningful. Net deferred income tax liabilities are calculated based on temporary differences between the tax basis of assets and liabilities and their book basis, which will result in taxable amounts in future years when the book basis is settled. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in
Perrigo Company plc - Item 7
Financial Condition, Liquidity and Capital Resources
any future periods. As a result, scheduling net deferred income tax liabilities as payments due by period could be misleading because this scheduling would not relate to liquidity needs.
Critical Accounting Estimates
The determination of certain amounts in our financial statements requires the use of estimates. These estimates are based upon our historical experiences combined with management’s understanding of current facts and circumstances. Although the estimates are considered reasonable based on the currently available information, actual results could differ from the estimates we have used. Management considers the below accounting estimates to require the most judgment and to be the most critical in the preparation of our financial statements. These estimates are reviewed by the Audit Committee.
Customer-Related Accruals and AllowancesRevenue Recognition
We generally record revenues fromNet product sales when the goods are shipped to the customer. For customers with Free on Board ("FOB") destination terms, a provision is recorded to exclude shipments estimated to be in-transit to these customers at the endinclude estimates of the reporting period. A sales allowance is recorded and accounts receivable are reduced as revenues are recognizedvariable consideration for estimated losses on credit sales due to customer claims for discounts, price discrepancies, returned goods, and other items. Revenue is also reduced for any contractual customer program arrangements and related liabilities are recorded concurrently.
We maintain customer-relatedwhich accruals and allowances that consistare established. Variable consideration for product sales consists primarily of chargebacks, rebates, other incentive programs, and related administrative fees recorded on the Consolidated Balance Sheets as Accrued customer programs, and sales returns and shelf stock allowances administrative fees,recorded on the Consolidated Balance Sheets as a reduction to Accounts receivable. Where appropriate, these estimates take into consideration a range of possible outcomes in which relevant factors, such as historical experience, current contractual and other incentive programs. Somestatutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns, are either probability-weighted to derive an estimate of expected value or the estimate reflects the single most likely outcome. Overall, these adjustments relate specificallyreserves reflect the best estimates of the amount of consideration to which we are entitled based on the RX segment while others relate toterms of the CHCAcontract. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from the estimates, these estimates are adjusted, which would affect revenue and CHCI segments. earnings in the period such variances become known.
The aggregate gross-to-net adjustments related to RX products can exceed 50% of the segment's gross sales. In contrast, the aggregate gross-to-net adjustments related to CHCACSCA and CHCICSCI typically do not exceed 10% of the segment's gross sales. Certain of these accrualsThe following table summarizes the activity in Accrued customer programs and allowances are recordedallowance accounts on the balance sheet as current liabilities, and others are recorded as a reduction in accounts receivable.
Consolidated Balance Sheets (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| RX | | All Other Segments | | |
| Chargebacks | | Medicaid Rebates | | Sales Returns and Shelf Stock Allowances | | Admin. Fees and Other Rebates | | Rebates and Other Allowances | | Total |
Balance at December 31, 2017 | $ | 229.9 |
| | $ | 36.8 |
| | $ | 76.2 |
| | $ | 43.2 |
| | $ | 126.2 |
| | $ | 512.3 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (3.5 | ) | | (3.5 | ) |
Provisions / Adjustments | 1,754.4 |
| | 58.3 |
| | 17.0 |
| | 99.6 |
| | 270.3 |
| | 2,199.6 |
|
Credits / Payments | (1,718.3 | ) | | (58.7 | ) | | (22.2 | ) | | (98.3 | ) | | (276.1 | ) | | (2,173.6 | ) |
Balance at December 31, 2018 | $ | 266.0 |
| | $ | 36.4 |
| | $ | 71.0 |
| | $ | 44.5 |
| | $ | 116.9 |
| | $ | 534.8 |
|
Balances acquired in business acquisition | — |
| | — |
| | — |
| | — |
| | 5.7 |
| | 5.7 |
|
Balances disposed of in business divestiture | — |
| | — |
| | — |
| | — |
| | (4.1 | ) | | (4.1 | ) |
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (1.7 | ) | | (1.7 | ) |
Provisions / Adjustments | 2,127.2 |
| | 47.9 |
| | 33.9 |
| | 116.5 |
| | 224.6 |
| | 2,550.1 |
|
Credits / Payments | (2,157.4 | ) | | (56.7 | ) | | (33.4 | ) | | (126.3 | ) | | (227.3 | ) | | (2,601.1 | ) |
Balance at December 31, 2019 | $ | 235.8 |
| | $ | 27.6 |
| | $ | 71.5 |
| | $ | 34.7 |
| | $ | 114.1 |
| | $ | 483.7 |
|
Perrigo Company plc - Item 7
Critical Accounting Estimates
Chargebacks
We market and sell U.S. Rx pharmaceutical products directly to wholesalers, distributors, warehousing pharmacy chains, and other direct purchasing groups. We also market products indirectly to independent pharmacies, non-warehousing chains, managed care organizations, and group purchasing organizations, collectively(collectively referred to as ("indirect"indirect customers"). In addition, we enter into agreements with some indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide chargeback credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler's invoice price. The accrual for chargebacks includes an estimate for outstanding claims that occurred but for which the related claim has not yet been paid, and an estimate for future claims that will be made when the wholesaler inventory is sold to the indirect customer. This estimate is based on historical chargeback experience, and confirmed wholesaler inventory levels, as well as estimatedwhich includes sell-through levels by wholesalers to retailers.retailers, and confirmed wholesaler inventory levels. We regularly assess current pricing dynamics and wholesaler inventory levels to ensure the liability for future chargebacks is fairly stated.
Medicaid Rebates
We participate in certain qualifying U.S. federal and state government programs whereby discounts and rebates are provided to participating government entities. Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers, after the final dispensing of the product by a pharmacy to a benefit plan participant. Medicaid reserves are based on expected payments, which are driven by patient usage, contract performance, and field inventory that will be subject to a Medicaid rebate. Medicaid rebates are typically billed up to 180 days after the product is shipped, but can be billed as many as 270 days after the quarter in which the product is dispensed to the Medicaid participant. As a result, our Medicaid rebate provision includes an estimate of outstanding claims for end-customer sales that occurred but for which the related claim has not been billed, and an estimate for future claims that will be made when inventory in the distribution channel is sold through to plan participants. Our calculation also requires other estimates, such as estimates of sales mix, to determine which sales are subject to rebates and the amount of such rebates. Our rebates are reviewed on a monthly basis against actual claims data to ensure the liability is fairly stated.
Returns and Shelf Stock Allowances
Consistent with industry practice, weWe maintain a return policy that allows our customers to return product within a specified period prior to and subsequent to the expiration date. Generally, product may be returned for a period beginning six months prior to its expiration date to up to one year after its expiration date. The majority of our product returns are the result of product dating, which falls within the range set by our policy, and are settled through the issuance of a credit to the customer. Our estimate of the provision for returns is based upon our historical experience with actual returns, which is applied to the level of sales for the period that corresponds to the period during which our customers may return product. The period is based on the shelf life of the products at the time of shipment. Additionally, when establishing our reserves, we consider factors such as levels of inventory in the distribution channel, product dating and expiration period, size and maturity of the market prior to a product launch, entrance into the market of additional competition, and changes in formulations.
Shelf stock allowances are credits issued to reflect changes in the selling price of a product and are based upon estimates of the amount of product remaining in a customer's inventory at the time of the anticipated price change. In many cases, the customer is contractually entitled to such a credit. The allowances for shelf stock adjustments are based on specified terms with certain customers, estimated launch dates of competing products, and estimated changes in market price.
Perrigo Company plc - Item 7
Critical Accounting Estimates
RX Administrative Fees and Other Rebates
Consistent with pharmaceutical industry practice, rebatesRebates or administrative fees are offered to certain wholesale customers, group purchasing organizations, and end-user customers. Settlement of rebates and fees generally may occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. AssumptionsEstimates used to establish the provision include level of wholesaler inventories, contract sales volumes, and average contract pricing.
Perrigo Company plc - Item 7
Critical Accounting Estimates
CHCACSCA and CHCICSCI Rebates and Other Allowances
In the CHCACSCA and CHCICSCI segments, we offer certain customers a volume incentive rebate if specific levels of product purchases are made during a specified period. The accrual for rebates is based on contractual agreements and estimated levels of purchasing. In addition, we have a reserve for product returns, primarily related to damaged and unsaleable products. We also have agreements with certain customers to cover promotional activities related to our products such as coupon programs, new store allowances, and product displays. The accrual for these activities is based on customer agreements and is established at the time product revenue is recognized.
Allowances for customer-related programs are generally recorded at the time of sale based on the estimates and methodologies described above. We continually monitor product sales provisions and re-evaluate these estimates as additional information becomes available, which includes, among other things, an assessment of current market conditions, trade inventory levels, and customer product mix. We make adjustments to these provisions at the end of each reporting period to reflect any such updates to the relevant facts and circumstances.
The following table summarizes the activity in our customer-related accrual and allowance accounts on the Consolidated Balance Sheets (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
Customer-Related Accruals and Allowances |
| RX | | All Other Segments * | | |
| Chargebacks | | Medicaid Rebates | | Returns and Shelf Stock Allowances | | Admin. Fees and Other Rebates | | Rebates and Other Allowances | | Total |
Balance at June 27, 2015 | $ | 191.4 |
| | $ | 31.6 |
| | $ | 62.1 |
| | $ | 45.3 |
| | $ | 128.8 |
| | $ | 459.2 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (3.2 | ) | | (3.2 | ) |
Provisions / Adjustments | 666.3 |
| | 11.7 |
| | 21.3 |
| | 47.8 |
| | 144.3 |
| | 891.4 |
|
Credits / Payments | (632.7 | ) | | (18.6 | ) | | (20.6 | ) | | (53.1 | ) | | (133.0 | ) | | (858.0 | ) |
Balance at December 31, 2015 | $ | 225.0 |
| | $ | 24.7 |
| | $ | 62.8 |
| | $ | 40.0 |
| | $ | 136.9 |
| | $ | 489.4 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (7.5 | ) | | (7.5 | ) |
Provisions / Adjustments | 1,437.2 |
| | 27.4 |
| | 48.0 |
| | 103.4 |
| | 259.6 |
| | 1,875.6 |
|
Credits / Payments | (1,445.2 | ) | | (27.5 | ) | | (33.7 | ) | | (108.8 | ) | | (258.0 | ) | | (1,873.2 | ) |
Balance at December 31, 2016 | $ | 217.0 |
| | $ | 24.6 |
| | $ | 77.1 |
| | $ | 34.6 |
| | $ | 131.0 |
| | $ | 484.3 |
|
Foreign currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | 0.1 |
|
Provisions / Adjustments | 1,564.3 |
| | 45.1 |
| | 43.7 |
| | 113.8 |
| | 281.2 |
| | 2,048.1 |
|
Credits / Payments | (1,551.4 | ) | | (32.9 | ) | | (44.6 | ) | | (105.2 | ) | | (286.1 | ) | | (2,020.2 | ) |
Balance at December 31, 2017 | $ | 229.9 |
| | $ | 36.8 |
| | $ | 76.2 |
| | $ | 43.2 |
| | $ | 126.2 |
| | $ | 512.3 |
|
| |
* | Primarily CHCA and CHCI. |
Revenue Recognition
Revenues from service and royalty arrangements, including revenues from collaborative agreements, consist primarily of royalty payments, payments for research and development services, up-front fees and milestone payments. If an arrangement requires the delivery or performance of multiple deliverables or service elements, we determine whether the individual elements represent "separate units of accounting". If the separate elements meet the requirements, we recognize the revenue associated with each element separately and revenue is allocated among elements based on their relative selling prices. If the elements within a multiple deliverable arrangement are not considered separate units of accounting, the delivery of an individual element is considered not to have occurred if there are undelivered elements that are considered essential to the arrangement. To the extent such arrangements contain refund clauses triggered by non-performance or other adverse circumstances, revenue is not recognized until all contractual obligations are satisfied.
Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate the performance period based on the specific terms of each collaborative agreement. Revenue
Perrigo Company plc - Item 7
Critical Accounting Estimates
associated with research and development services is recognized on a proportional performance basis over the period that we perform the related activities under the terms of the agreement. Revenue resulting from the achievement of contingent milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract.
Inventory Reserves
We maintain reserves for estimated obsolete or unmarketable inventory based on the difference between the cost of the inventory and its estimated market value. In estimating the reserves, management considers factors such as excess or slow-moving inventories, product expiration dating, products on quality hold, current and future customer demand, and market conditions. Changes in these conditions may result in additional reserves.
Income Taxes
Our tax rate is subject to adjustment over the balance of the year due to, among other things, income tax rate changes by governments; the jurisdictions in which our profits are determined to be earned and taxed; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; adjustments to our interpretation of transfer pricing standards,standards; changes in available tax credits, grants and other incentives; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental U.S. and international tax reform);laws; changes in U.S. generally accepted accounting principles; expiration of or the inability to renew tax rulings or tax holiday incentives; and the repatriation of earnings with respect to which we have not previously provided taxes. For the year ended December 31, 2019 we recorded a net decrease in valuation allowances of $56.6 million, comprised primarily of a decrease in the U.S. valuation allowance related to the acquisition of Ranir and disposal of the Perrigo Animal Health business.
Although we believe that our tax estimates are reasonable and that we prepare our tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audit, and any related litigation, could be materially different from our estimates or from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on operating results and/or cash flows in the periods for which that determination is made. In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, and/or interest assessments.assessments (refer to Item 8. Note 15).
Legal Contingencies
We are involved in product liability, patent, commercial, regulatory and other legal proceedings that arise in the normal course of business. We record a liability when a loss is considered probable and the amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range and no amount within that range is a better estimate, the minimum amount in the range is accrued. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. We have established reserves for certain of our legal matters (refer to Item 8. Note 1617). We alsodo not incorporate insurance recoveries into our reserves for legal contingencies. We separately record anyreceivables for amounts due under insurance policies when we consider the realization of recoveries that arefor claims to be probable, of occurring.which may be different than the timing in which we establish the loss reserves.
Perrigo Company plc - Item 7
Critical Accounting Estimates
Acquisition Accounting
We account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recorded at fair value, with limited exceptions. Any excess of the purchase price over the fair value of the specifically identified net assets acquired is recorded as goodwill. Amounts allocated to acquired In Process Research and Development ("IPR&D") are recognized at fair value and initially characterized as indefinite-lived intangible assets, irrespective of whether the acquired IPR&D has an alternative future use. If the acquired net assets do not constitute a business, or substantially all of the fair value is in a single asset or group of similar assets, the transaction is accounted for as an asset acquisition and no goodwill is recognized. In an asset acquisition, acquired IPR&D with no alternative future use is charged to expense at the acquisition date.
The judgments made by managementSignificant judgment is required in determiningestimating the estimated fair value assignedof intangible assets and in assigning their respective useful lives. The acquired intangible assets can include customer relationships, trademarks, trade names, brands, developed product technology and IPR&D assets. In some of our acquisitions, we acquire IPR&D intangible assets. For acquisitions accounted for as business combinations, IPR&D is considered to each class ofbe an indefinite-lived intangible asset acquireduntil the research is completed, at which point it then becomes a definite-lived intangible asset, or is determined to have no future use and liability assumed can materially impact our results of operations. As part of the valuation procedures, we typically consult an independent advisor.is then impaired. There are several methods that can be used to determine the fair value.value of our intangible assets. We typically use an income approach for valuing ourto value the specifically identifiable intangible assets by employing eitherwhich is based on forecasts of the expected future cash flows. We have historically used a relief from royalty or multi-period excess earnings methodology. The relief from royalty method assumes that, if the acquired company did not own the intangible asset or intellectual property, it would be willing to pay a royalty for its use. The benefit of ownership of the intellectual property is valued as the relief from the royalty
Perrigo Company plc - Item 7
Critical Accounting Estimates
expense that would otherwise be incurred. Typically we use this method for valuing readily transferable intangible assets that have licensing appeal, such as trade namesfair value estimates are based on available historical information and trademarkson future expectations and certain technology assets.
The multi-period excess earnings approach starts with a forecast of the net cash flows expected to be generatedassumptions deemed reasonable by the asset over its estimated useful life. These cash flowsmanagement but are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.inherently uncertain. We typically use this method for valuingconsult with an independent advisor to assist in the valuation of these intangible assets such as developed product technology, customer relationships, product formulations, and IPR&D.
Some of the more significantassets. Significant estimates and assumptions inherent in one or both of these income approaches include:
the valuations include discount rates, revenue growth assumptions and expected profit margins. We consider marketplace participant assumptions in determining the amount and timing of projected future cash flows adjusted foralong with the probabilitylength of technical and marketing success;
our customer relationships, the amount and timing of projected costsattrition, product or technology life cycles, barriers to develop IPR&D into commercially viable products;
the discount rate selected to measure the risks inherent in the future cash flows;
the estimate of an appropriate market royalty rate; and
an assessment of the asset's life cycleentry and the competitive trends impactingrisk associated with the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry.
We believe the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions; however, unanticipated events and circumstances may occur that may affect the accuracy and validity of such assumptions, estimates or actual results.
cash flows in concluding upon our discount rate. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, we may record adjustments to the assets acquiredpurchase accounting. In addition, unanticipated market or macroeconomic events and liabilities assumed withcircumstances may occur that could affect the corresponding offset to goodwill. Upon the conclusionaccuracy or validity of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Operations.estimates and assumptions.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Useful life isWith the period over whichexception of certain trademarks, trade names, and brands and IPR&D, the majority of our acquired intangible asset isassets are expected to contribute directly or indirectlyhave determinable useful lives. Our assessment as to our future cash flows. We determine the useful lives of these intangible assets is based on a number of factors such as legal, regulatory, or contractual provisions that may limit the usefulincluding competitive environment, market share, trademark, brand history, underlying product life cycles, operating plans and the effectsmacroeconomic environment of obsolescence, anticipated demand, existencethe countries in which the trademarked or absence of competition, and other economic factors onbranded products are sold. Definite-lived intangible assets are amortized to expense over their estimated useful life.
Financial Assets
We accounted for the Tysabri® royalty stream as a financial asset and elected to use the fair value option model. We made the election to account for the Tysabri® financial asset using the fair value option as we believed this method was most appropriate for an asset that did not have a par value, a stated interest stream, or a termination date. The change in estimated fair value from investments in royalty rights is presented on our Consolidated Statements of Operations under the caption, "Change in financial assets."
We were entitled to quarterly payments of royalties on Tysabri® sales. We recorded our right to royalty payments from Biogen when earned and when collection was reasonably assured. We recorded the change in fair value of the Tysabri® financial asset in our financial statements each period. Critical estimates in determining the fair value are the underlying revenue assumptions of Tysabri® sales and the discount rates. The revenue assumptions were impacted by product demand and market growth assumptions, inventory target levels, product approval and pricing assumptions. Factors that could cause a change in estimates of future cash flows include a change in estimated market size, entry of a competitive product that would erode market share, manufacturing and approval of a biosimilar equivalent product, a change in pricing strategy or reimbursement coverage, a delay in obtaining regulatory approval, a change in dosage of the product, and a change in the number of treatments.
Perrigo Company plc - Item 7
Critical Accounting Estimates
The Tysabri® financial asset acquired in 2013 as part of the Elan acquisition represented a single unit of accounting. The fair value of the financial asset acquired was determined by using a discounted cash flow analysis related to the expected future cash flows to be generated by the royalty stream from Biogen based on the royalty percentage payments of Tysabri® sales. The financial asset is classified as a Level 3 asset within the fair value hierarchy, as our valuation utilized significant unobservable inputs, including industry analyst estimates for global Tysabri® sales, probability weighted as to the timing and amount of future cash flows along with certain discount rate assumptions. Cash flow forecasts included the estimated effect and timing of future competition, considering patents in effect for Tysabri® through 2024 and contractual rights to receive cash flows into perpetuity. The discounted cash flows are based upon the expected royalty stream forecasted into perpetuity using a 20-year discrete period with a declining rate terminal value. The pre-tax discount rate utilized was 7.72% and 7.83% at December 31, 2015, and June 27, 2015, respectively. Significant judgment is required in selecting appropriate discount rates. At December 31, 2015, and June 27, 2015, we performed an evaluation to assess the discount rate and general market conditions potentially affecting the fair value of our Tysabri® financial asset. As of December 31, 2015, had this discount rate increased or decreased by 0.5%, the fair value of the asset would have increased by $270.0 million or decreased by $260.0 million, respectively. As of June 27, 2015, had this discount rate increased or decreased by 0.5%, the fair value of the asset would have decreased by $260.0 million or increased by $290.0 million, respectively. The estimated fair value of the asset is subject to variation should those cash flows vary significantly from those estimates. Quarterly, we assess the expected future cash flows and to the extent such payments are greater or less than initial estimates, or the timing of such payments is materially different than the original estimates, we will adjust the estimated fair value of the asset. As of December 31, 2015, if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $270.0 million or decreased by $280.0 million, respectively. As of June 27, 2015, if the expected royalty cash flows used in the estimation process had increased or decreased by 5.0%, the fair value of the asset would have increased by $280.0 million or decreased by $280.0 million, respectively. In November 2016, we announced we were evaluating strategic alternatives for the Tysabri® financial asset. As of December 31, 2016, the financial asset was adjusted based on this strategic review and sale process, see discussion below for additional information on the sale.
The following table summarizes the change in our Consolidated Balance Sheet for the Tysabri® financial asset, which includes our fair value adjustment that is a Level 3 measurement under ASC 820 and is included in our Consolidated Statement of Operations for the years ended December 31, 2017, and December 31, 2016, and the six months ended December 31, 2015 (in millions):
|
| | | | | | | | | | | |
| Year Ended | | Six Months Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
Tysabri® financial asset | | | | | |
Beginning balance | $ | 2,350.0 |
| | $ | 5,310.0 |
| | $ | 5,420.0 |
|
Royalties earned | — |
| | (351.8 | ) | | (167.3 | ) |
Change in fair value | — |
| | (2,608.2 | ) | | 57.3 |
|
Divestiture | (2,350.0 | ) | | — |
| | — |
|
Ending balance | $ | — |
| | $ | 2,350.0 |
| | $ | 5,310.0 |
|
Change in Financial Assets
On March 27, 2017, we announced the completed divestment ofWe valued our Tysabri® financial asset to Royalty Pharma for up to $2.85 billion, consisting of $2.2 billion in cash and up to $250.0 million and $400.0 million in milestone payments if the royalties on global net sales of Tysabri® that are received by Royalty Pharma meet specific thresholds in 2018 and 2020, respectively. As a result of this transaction, we transferred the entire financial asset to Royalty Pharma and recorded a $17.1 million gain during the three months ended April 1, 2017. We elected to account for the contingent milestone payments using the fair value option method, and these were recorded at an estimated fair value of $134.5 million as of December 31, 2017. We chose the fair value option as we believe it will help investors understand the potential future cash flows we may receive associated with the two contingent milestones.
Perrigo Company plc - Item 7
Critical Accounting Estimates
We valued the contingent milestone paymentsfrom Royalty Pharma using a modified Black-Scholes Option Pricing Model ("BSOPM"). Key inputs in the BSOPM are the estimated volatility and rate of return of royalties on global net sales of Tysabri® that are received by Royalty Pharma over time until payment of the contingent milestone payments is completed.milestones are resolved. Volatility and the estimated fair value of the milestones have a positive relationship such that higher volatility translates to a higher estimated fair value of the contingent milestone payments. In the valuation of contingent milestone payments performed, we assumed volatility of 30.0% and a rate of return of 8.07% as of December 31, 2017. We assess volatility and rate of return inputs quarterly by analyzing certain market volatility benchmarks and the risk associated with Royalty Pharma achieving the underlying projected royalties. DuringThe table below represents the year ended December 31, 2017,volatility and rate of return:
|
| | | | | |
| Year Ended |
| December 31, 2019 | | December 31, 2018 |
Volatility | 30.0 | % | | 30.0 | % |
Rate of return | 7.92 | % | | 8.05 | % |
In order for us to receive the fair value of themilestone payment related to 2020, Royalty Pharma contingent milestone payments decreased $42.0 million, as a result of the decrease in the estimated projectedfrom Biogen for Tysabri® revenues due to the launch of Ocrevus sales in 2020 must exceed $351.0 million. If Royalty Pharma payments from Biogen for Tysabri® late in the first quarter of 2017.
In addition, payment of the contingent milestone payments is dependent on global net sales of Tysabri®. Of the $134.5 million of estimated fair valued contingent milestone payments as of December 31, 2017, $79.7 million and $54.8 million relates to the 2018 and 2020 contingent milestone payments, respectively. If Tysabri® global net sales do not meet the prescribed threshold in 2018, we will write off the $79.7 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations. If the prescribed threshold is exceeded, we will write up the asset to $250 million and recognize income of $170.3 million in Change in financial assets on the Consolidated Statement of Operations. If Tysabri® global net sales do
Perrigo Company plc - Item 7
Critical Accounting Estimates
not meet the prescribed threshold in 2020, we will write offwrite-off the $54.8$95.3 million asset as an expense to Change in financial assets on the Consolidated Statement of Operations.and record a loss. If the prescribed threshold is exceeded, we will write upincrease the asset to $400.0 million and recognize income of $345.2$304.7 million in Change in financial assets on the Consolidated Statement of Operations.
Global Tysabri® net sales need to exceed $1.9 billion and $2.0 billion in 2018 and 2020, respectively in order for Royalty Pharma to receive the level of royalties needed to trigger the milestone payments owed to us. Tysabri® net sales are anticipated to decline on a global basis in 2018, compared to 2017, due to increased competition from Ocrevus®, offset by volume growth in Tysabri® international markets (refer to Item 8. Note 6).
The table below presents a reconciliation for the Royalty Pharma contingent milestone payments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in millions). Change in fair value in the table was recorded in Change in financial assets on the Consolidated Statements of
Operations.Operations (refer to Item 8. Note 7). |
| | | |
| Year Ended |
| December 31, 2017 |
Royalty Pharma Contingent Milestone Payments | |
Beginning balance | $ | — |
|
Additions | 184.5 |
|
Payments | (8.0 | ) |
Change in fair value | (42.0 | ) |
Ending balance | $ | 134.5 |
|
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents amounts paid for an acquisition in excess of the fair value of net assets received. We test goodwill forhave six reporting units subject to impairment testing annually, or more frequently if changes in circumstances or the occurrence of events suggest an impairment exists (refer to Item 8. Note 1). Effective in the year ended December 31, 2016,which we changed our segment structure. We performed our annual goodwill testing as of October 1, 2017,on the first day of the fourth quarter of the years ended December 31, 2019, 2018, and 2017. We performed impairment testing more frequently if events suggest an impairment may exist. We had triggering events during the second quarter of the year ended December 31, 2017.2019 and the third quarter of the year ended December 31, 2018, and we performed interim impairment tests in those periods. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows that include assumptions about future performance. The discount rates used in testing each of our reporting units’ goodwill for impairment as ofduring our interim and annual testing date in the fourth quarter of 2017 arewere based on the weighted average cost of capital determined for each of the Company’sour reporting units andunits. In our annual impairment test as of September 29, 2019, discount rates ranged from 7.5% to 13.5%. Perpetual12.0%, and perpetual growth rates for each reporting unitranged from 0.0% to 2.0%. In our annual impairment test as of September 30, 2018, discount rates ranged from 8.5% to 13.8%, and perpetual growth rates ranged from 2.0% to 3.0%. Changes in these estimates may result in the recognition of an impairment loss. We recorded goodwill impairment losses of $109.2 million related to our RX U.S. reporting unit and $136.7 million related to animal health during the years ended December 31, 2019 and December 31, 2018, respectively, which were recorded in Impairment charges on the Consolidated Statements of Operations. No goodwill impairments were recorded during the year ended December 31, 2017. Perrigo Company plc - Item 7
Critical Accounting EstimatesThe goodwill impairment that we recorded in the RX U.S. reporting unit during the fourth quarter of the year ended December 31, 2019 adjusted the carrying value of the reporting unit to its estimated fair value. Changes in discount rates, projected future cash flows, market valuation multiples and other estimates could result in additional goodwill impairment in this reporting unit in future periods.
During our annual goodwill testing as of October 1, 2017,September 29, 2019 and September 30, 2018, we determined the fair value of each of ourthe Branded Consumer Self-care ("BCS") reporting units exceeded theirunit included in the CSCI segment was less than 10.0% higher than its net book values. Thevalue in both analyses. We performed additional quantitative analysis during the three months ended December 31, 2018 and concluded that the fair valuesvalue of the BCH, UK AUS, and Animal HealthBCS reporting units were eachunit remained less than 25.0%10.0% higher than their respectiveits net book values.value as of December 31, 2018. As a result theseof the relatively narrow margin between fair value and net book value during the three months ended December 31, 2019 and 2018, this reporting units are inherentlyunit is at a higher risk for future impairments if they experienceit experiences deterioration in business performance or market multiples or increases in discount rates. These reporting units had the following remaining
During our annual goodwill balancestesting as of December 31, 2017:September 29, 2019, we determined the fair value of the CSC UK and Australia reporting unit included in the CSCI segment was less than 20.0% higher than its net book value. With a margin between fair value and net book value in this range, the reporting unit is at risk for future goodwill impairments if it experiences deterioration in business performance or market multiples or increases in discount rates.
|
| | | | | | | | |
Reporting Unit | | Goodwill Remaining in Reporting Unit | | Segment | | Fair Value in excess of Carrying Value |
BCH | | $ | 1,026.0 |
| | CHCI | | 6.6% |
Animal Health | | $ | 178.9 |
| | CHCA | | 23.6% |
UK AUS | | $ | 53.1 |
| | CHCI | | 18.3% |
The discounted cash flow forecasts used for theseour reporting units in goodwill impairment testing include assumptions about future activity levels in the near term and longer-term. If growth in theseour reporting units is lower than expected, we may experience deterioration in our cash flow forecasts that may indicate goodwill in theone or more reporting units may beis impaired in future impairment tests. We continue to monitor the progress of our reporting units and assess the reporting unitsthem for potential impairment should impairment indicators arise, as applicable, and at least annually during our fourth quarter impairment testing.
Management performed sensitivity analyses on the discounted cash flow valuations that were prepared to estimate the enterprise values of each reporting unit. Discount rates were increased and decreased by increments of 50 basis points, up to cumulative increases and decreases of 150 basis points. Perpetualperpetual revenue growth rates were increased and decreased by increments of 25 or 50 basis points, up to cumulative increases and decreases of 100points. For the BCS reporting unit, a 75 basis points. A summary ofpoint increase in the sensitivity analysis results is provided below for the three reporting units for which estimated fair value was less than 25.0% higher than net book value.
BCH
Adiscount rate, or a 50 basis point increase in the discount rate combined with a 10025 basis point decrease in the perpetual revenueresidual growth rate, or different combinations thereof, would indicate potential impairment for this reporting unit. For the CSC UK and
Perrigo Company plc - Item 7
Critical Accounting Estimates
Australia reporting unit, a 150 basis point increase in the discount rate, or a 100 basis point increase in the discount rate combined with a 50 basis point decrease in the residual growth rate, would indicate potential impairment for this reporting unit. Our sensitivities for both the BCS and CSC UK and Australia reporting units assume a corresponding decrease in market valuation multiples. Based on the sensitivity of the discount rate assumptionassumptions on the BCH reporting unit analysis, anythese analyses, an increase in the discount rate over the next twelve months could negatively impact the estimated fair value of thisthe reporting unitunits and lead to a future impairment. Certain macroeconomic factors which are not controlled by the reporting unit,units, such as rising inflation or interest rates, could cause an increase in the discount rate to occur. Deterioration in BCH performance of our reporting units over the next twelve months, such as lower than expected revenuesrevenue or profitability that has a sustained impact on future periods, could also represent potential indicators of impairment requiring further impairment analysis.
Animal Health
A 100 basis point increase in the discount rate combined with a 100 basis point decrease in the perpetual revenue growth rate, or a 150 basis point increase in the discount rate combined with 50 basis point decrease in the perpetual revenue growth rate, would indicate potential impairment of this reporting unit. If the expected results for this reporting unit are not achieved, potential indicators of impairment may result, requiring further analysis.
During the fourth quarter of 2017, the Animal Health reporting unit had an indication of potential impairment resulting from the termination of a supply agreement. We prepared an impairment test as of December 31, 2017 and determined the fair value of the Animal Health reporting unit continued to exceed net book value, by 8.9%. The 8.9% margin was lower than the excess fair value over carrying value of 23.6% that was estimated as of October 1, 2017. Therefore, while no impairment was recorded in 2017, the supply agreement termination increased the risk of future impairment in this reporting unit. Based on our estimates of fair value and the reported carrying values as of December 31, 2017, a 100 basis point increase in the discount rate, or a 100 basis point decrease in the perpetual revenue growth rate, would indicate potential impairment of this reporting unit. If the expected results for this reporting unit are not achieved, additional indicators of impairment may result, requiring further analysis.
Perrigo Company plc - Item 7
Critical Accounting Estimates
UK AUS
A 150 basis point increase in the discount rate, or a 100 basis point increase in the discount rate combined with a 100 basis point decrease in the perpetual revenue growth rate, would indicate potential impairment of this reporting unit. If the expected results for this reporting unit are not achieved, potential indicators of impairment may result, requiring further analysis.
The sensitivity analyses described above for BCH, UK AUS, and Animal Health, while a useful tool, should not be used as a sole predictor of impairment. A thorough analysis of all the facts and circumstances existing at that time would need to be performed to determine if recording an impairment loss was appropriate.
Certain trade names, trademarks, brands, as well as IPR&D assets, are determined to have an indefinite useful life and are not subject to amortization. We review them for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that any individual asset might be impaired, and adjust the carrying value of the asset as necessary. IPR&D assets are initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. We recorded the following impairment charges on the Consolidated Statements of Operations (in millions):
|
| | | | | | | | | | | |
| Year Ended | | Six Months Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
Goodwill | $ | — |
| | $ | 1,092.6 |
| | $ | — |
|
Indefinite-lived intangible assets | $ | — |
| | $ | 849.5 |
| | $ | 185.1 |
|
IPR&D | $ | 12.7 |
| | $ | 3.5 |
| | $ | — |
|
As of December 31, 2017, the remaining goodwill and indefinite-lived asset balances are $4.2 billion and $90.3 million, respectively (refer to See Item 8. Note 34 and Note 67 for additional information regarding goodwill and indefinite-lived intangible asset impairment testing results and assumptions used, respectively).
Definite-Lived Intangible Assets
Definite-lived intangible assets consist of a portfolio of developed product technology/formulation and product rights, distribution and license agreements, customer relationships, non-compete agreements, and certain trademarks, trade names, and brands. The assets are amortized on either a straight-line basis or proportionately to the benefits derived from those relationships or agreements.
For intangible assets subject to amortization, an impairment analysis is performed whenever events or changes in circumstances indicate that the carrying amount of any individual asset may not be recoverable. The carrying amount of an intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is recognized if the carrying amount of the asset is not recoverable and its carrying amount exceeds its fair value. We recorded the following impairment charges on the Consolidated Statements of Operations (in millions):
|
| | | | | | | |
| Year Ended |
| December 31, 2017 | | December 31, 2016 |
Definite-lived Intangible assets | $ | 19.7 |
| | $ | 665.5 |
|
To the extent we experience additional unanticipated competitive market entrants or major adverse macro-economic events, we may incur additional impairment losses (refer to Item 8. Note 3 and Note 6 for a more detailed discussion of the impaired definite-lived intangible assets and assumptions used, respectively).
Perrigo Company plc - Item 7
Critical Accounting Estimates
Guaranteed Liabilities
On November 21, 2017, we completed the sale of our Israel API business, which was previously classified as held-for-sale, to SK Capital (refer to Item 8. Note 2). As a result of the sale, we recognized a guarantee liability. Per the agreement, we will be reimbursed for tax receivables for tax years prior to closing and will need to reimburse SK Capital for the settlement of any uncertain tax liability positions for tax years prior to closing. In addition, after closing and going forward, the Israel API business, will be assessed by and liable to the Israel Tax Authority ("ITA") for any audit findings. We are no longer the primary obligor on the liabilities transferred to SK Capital on November 21, 2017, however, we have provided a guarantee on certain obligations that were recorded at a fair value of $13.8 million, with a maximum possible payout of $34.9 million.further information.
Recently Issued Accounting Standards Pronouncements
See Item 8. Note 1 for information regarding recently issued accounting standards.
| |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Exchange Risk
We are a global company with operations primarily throughout North America, Europe, Australia, Mexico, and Israel. We transact business in each location's local currency and in foreign currencies, thereby creating exposures to changes in exchange rates. Our largest exposure is the movement of the U.S. dollar relative to the euro, which has increased due to the Omega acquisition.euro. In addition, our U.S. operations continue to expand their export business, primarily in Canada, China, and Europe, and are subject to fluctuations in the respective exchange rates relative to the U.S. dollar. A large portion of the sales of our Israeli operations is in foreign currencies, primarily U.S. dollars and euros,Euros, while these operations largely incur costs in their local currency. Further, a portion of Biogen's global sales of Tysabri® are denominated in local currencies, creating exposures to changes in exchange rates relative to the U.S. dollar and thereby impacting the amount of U.S. dollar royalties necessary to achieve our contingent payment thresholdsthreshold in 2018 and 2020.
Due to different sales and cost structures, certain segments experience a negative impact and certain segments a positive impact as a result of changes in exchange rates. We estimate the translation effect of a ten percent devaluation of the U.S. dollar relative to the other foreign currencies in which we transact business would have increased operating income of our non-U.S. operating units by approximately $87.1$31.4 million for the year ended December 31, 2017.2019. This sensitivity analysis has inherent limitations. The analysis disregards the possibility that rates of multiple foreign currencies will not always move in the same direction relative to the value of the U.S. dollar over time and does not account for foreign exchange derivatives that we utilize to mitigate fluctuations in exchange rates.
In addition, we enter into certain purchase commitments for materials that, although denominated in U.S. dollars, are linked to foreign currency valuations. These commitments generally contain a range for which the price of materials may fluctuate over time given the value of a foreign currency.
The translation of the assets and liabilities of our non-U.S. dollar denominated operations is made using local currency exchange rates as of the end of the year. Translation adjustments are not included in determining net income but are disclosed in Accumulated Other Comprehensive Income ("AOCI") within shareholders’ equity on the Consolidated Balance Sheets until a sale or substantially complete liquidation of the net investment in the subsidiary takes place. In certain markets, we could recognize a significant gain or loss related to unrealized cumulative translation adjustments if we were to exit the market and liquidate our net investment. As of December 31, 2017,2019, cumulative net currency translation adjustments decreasedincreased shareholders’ equity by $260.6$132.9 million.
We monitor and strive to manage risk related to foreign currency exchange rates. Exposures that cannot be
Perrigo Company plc - Item 7A
naturally offset within a local entity to an immaterial amount are often hedged with foreign exchange derivatives or netted with offsetting exposures at other
entities (refer to Item 8. Note 8 for further information regarding our derivative and hedging activities).entities. We cannot predict future changes in foreign currency movements and fluctuations that could materially impact earnings.Perrigo Company plc - Item 7A
Interest Rate Risk
We are exposed to interest rate changes primarily as a result of interest income earned on our investment of cash on hand and interest expense on borrowings used to finance acquisitions and other general corporate purposes.borrowings.
We have in the past, and may in the future, enter into certain derivative financial instruments related to the management of interest rate risk, when available on a cost-effective basis (refer to Item 8. Note 8 for further information regarding our derivative and hedging activities).basis. These instruments are managed on a consolidated basis to efficiently net exposures and thus take advantage of any natural offsets. We do not use derivative financial instruments for speculative purposes. Gains and losses on hedging transactions are offset by gains and losses on the underlying exposures being hedged. We do not use derivative financial instruments for speculative purposes.
See Item 8. Note 9 and Note 1 for further information regarding our derivative instruments and hedging activities. Perrigo Company plc - Item 8
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | PAGE NO. | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | PAGE NO. |
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Perrigo Company plc - Item 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Perrigo Company plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Perrigo Company plc (the Company) as of December 31, 2017, 20162019 and 2015,2018, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017 and 2016, the period from June 28, 2015 to December 31, 2015, and the fiscal year ended June 27, 2015,2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 and 2016, the period from June 28, 2015 to December 31, 2015, and the fiscal year ended June 27, 2015,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2018February 27, 2020 expressed an adverseunqualified opinion thereon.
Adoption of Accounting Standards Update (ASU) No. 2017-04
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2019 due to the adoption of ASU No. 2017-04, Intangibles - Goodwill and Other.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Perrigo Company plc - Item 8
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| | Valuation of Goodwill for the RX U.S., BCS, and CSC UK and Australia Reporting Units |
Description of the Matter | | At December 31, 2019, the Company’s goodwill was $4,116.7 million. As discussed in Note 1 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level. The Company’s goodwill is initially assigned to its reporting units as of the acquisition date. The Company recorded a goodwill impairment charge of $109.2 million for the year ended December 31, 2019 in the RX U.S. reporting unit.
Auditing management’s annual goodwill impairment test is complex and highly judgmental due to the significant measurement uncertainty in determining the fair value of the reporting units. In particular, the fair value estimates for the RX U.S., Branded Consumer Self-Care (BCS) and Consumer Self-Care UK and Australia (CSC UK and Australia) reporting units were sensitive to significant assumptions such as revenue growth, operating margins, and discount rate, which are affected by expected future market or economic conditions. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment assessment process. For example, we tested controls over the Company’s forecast process as well as controls over management’s review of the significant assumptions discussed above in estimating the fair values of the reporting units.
To test the fair value of the Company’s reporting units, our audit procedures included, among others, assessing methodologies used and testing the significant assumptions discussed above as well as the completeness and accuracy of the underlying data used by the Company. For example, we compared the significant assumptions used by management to current industry and economic trends, changes in the Company’s business model, customer base or product mix and other relevant factors. We performed sensitivity analyses of the significant assumptions to evaluate the change in the fair value of the reporting unit resulting from changes in the assumptions. We also reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and evaluated the implied control premium. We also assessed the historical accuracy of the significant assumptions used by management to determine the fair value of its reporting units. The evaluation of the Company’s methodology and significant assumptions was performed with the assistance of our valuation specialists.
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| | Uncertain Tax Positions |
Description of the Matter | | As described in Note 15 to the consolidated financial statements, the Company operates in multiple jurisdictions with complex tax policy and regulatory environments and establishes reserves for uncertain tax positions in accordance with the accounting guidance governing uncertainty in income taxes. Uncertainty in a tax position may arise because tax laws are subject to interpretation. The Company uses significant judgment to (1) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (2) measure the amount of tax benefit that qualifies for recognition. At December 31, 2019, the Company had liabilities of $350.5 million, excluding interest and penalties, relating to uncertain tax positions.
Auditing the measurement of the Company’s tax contingencies was challenging because the evaluation of whether a tax position is more likely than not to be sustained and the measurement of the benefit of various tax positions can be complex, involves significant judgment, and is based on interpretations of tax laws and legal rulings. |
Perrigo Company plc - Item 8
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How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting process for uncertain tax positions. For example, we tested controls over management’s identification of uncertain tax positions and its application of the recognition and measurement principles for uncertain tax positions.
Our audit procedures included, among others, assessing the Company’s correspondence with the relevant tax authorities and evaluating income tax opinions or other third-party advice obtained by the Company. To test the Company’s assessment and measurement of uncertain tax positions, we involved our tax professionals to assess whether the uncertain tax positions identified by the Company are more-likely-than-not to be sustained upon audit and, if so, to assist in testing the assumptions made by the Company in measuring the amount of tax benefit that qualifies for recognition. We also used our knowledge of, and experience with, the application of domestic and international income tax laws by the relevant income tax authorities to evaluate the Company’s assessments of whether the uncertain tax position is more-likely-than-not to be sustained and, if so, the potential outcomes that could occur upon an audit by a taxing authority. We tested the completeness and accuracy of the data and calculations used to determine the amount of tax benefit to recognize. We also evaluated the adequacy of the Company’s disclosures to the consolidated financial statements in relation to these matters. |
| | Chargebacks and Product Returns |
Description of the Matter | | As described in Note 1 to the consolidated financial statements under the caption “Revenue,” net product sales include estimates of variable consideration for which accruals and allowances have been established. Variable consideration for product sales include chargebacks, which are recorded as Accrued customer programs, and product returns, which are recorded as a reduction to Accounts receivable.
Auditing the chargeback liability and product returns reserve was challenging because of the subjectivity of certain assumptions required to estimate these amounts. In particular, the accrual for chargebacks includes estimates for outstanding claims that have occurred but for which the related claim has not yet been paid and for future claims that will be made when the wholesaler inventory is sold to the indirect customer. These estimates are based on historical chargeback experience and estimated wholesaler inventory levels. In addition, the estimate of the product returns reserve is based on historical experience with actual returns and considers other factors such as levels of inventory in the distribution channel, product dating and expiration period, size and maturity of the market prior to a product launch, entrance into the market of additional competition, and changes in formulations. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls addressing the risks of material misstatement for chargebacks and product returns. This included, for example, testing controls over management’s review of the significant assumptions used to calculate the chargeback liabilities and product returns reserves discussed above.
To test the Company’s chargeback liability and product returns reserves, we performed audit procedures that included, among others, testing the accuracy and completeness of the underlying data used in the calculations and evaluating the significant assumptions used by management to estimate its reserves. We also tested the Company's retrospective review of the accuracy of the reserves for product returns, compared the results of the retrospective review to the current year and performed analytical procedures, based on Company and external data sources, to evaluate the completeness of the reserves. |
Perrigo Company plc - Item 8
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| | Accounting for Acquisition of Ranir |
Description of the Matter | | As disclosed in Note 3 to the consolidated financial statements, the Company completed its acquisition of Ranir Global Holdings, LLC (Ranir) in 2019. The transaction was accounted for as a business combination.
The recognition and measurement of the Company’s acquisition of Ranir in the 2019 consolidated financial statements was considered especially challenging and required significant auditor judgment due to the complex determination by management of the appropriate assumptions, such as discount rates, revenue growth rates, and projected profit margins, for the valuation of acquired assets, including customer relationships. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls addressing the risks of material misstatement over its accounting for the Ranir acquisition. For example, we tested the effectiveness of controls over the estimation process supporting the recognition and measurement of consideration transferred and customer relationships. We also tested the effectiveness of controls over management’s review of the significant assumptions used in the valuation models.
To test the Company’s accounting for the Ranir acquisition, we performed audit procedures that included, among others, evaluating management’s identification of assets acquired and liabilities assumed and assessing significant assumptions used for the fair value measurements, including the discount rates, revenue growth rates and projected profit margins used in valuing the customer relationships. We involved our valuation specialists to assist with the evaluation of methodologies used by the Company and significant assumptions included in the fair value estimates. We also evaluated the Company’s disclosures to the consolidated financial statements. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Grand Rapids, Michigan
March 1, 2018February 27, 2020
Perrigo Company plc - Item 8
PERRIGO COMPANY PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
| | | Year Ended | | Six Months Ended | | Year Ended | Year Ended |
| December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | June 27, 2015 | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
Net sales | $ | 4,946.2 |
| | $ | 5,280.6 |
| | $ | 2,632.2 |
| | $ | 4,227.1 |
| $ | 4,837.4 |
| | $ | 4,731.7 |
| | $ | 4,946.2 |
|
Cost of sales | 2,966.7 |
| | 3,228.8 |
| | 1,553.3 |
| | 2,582.9 |
| 3,064.1 |
| | 2,900.2 |
| | 2,966.7 |
|
Gross profit | 1,979.5 |
| | 2,051.8 |
| | 1,078.9 |
| | 1,644.2 |
| 1,773.3 |
| | 1,831.5 |
| | 1,979.5 |
|
| | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | |
Distribution | 87.0 |
| | 88.3 |
| | 47.9 |
| | 67.7 |
| 96.1 |
| | 94.2 |
| | 87.0 |
|
Research and development | 167.7 |
| | 184.0 |
| | 88.2 |
| | 187.8 |
| 187.4 |
| | 218.6 |
| | 167.7 |
|
Selling | 598.4 |
| | 665.0 |
| | 325.9 |
| | 319.0 |
| 567.0 |
| | 595.7 |
| | 598.4 |
|
Administration | 461.1 |
| | 452.2 |
| | 306.8 |
| | 385.3 |
| 503.0 |
| | 435.9 |
| | 461.1 |
|
Impairment charges | 47.5 |
| | 2,631.0 |
| | 215.6 |
| | 6.8 |
| 184.5 |
| | 224.4 |
| | 47.5 |
|
Restructuring | 61.0 |
| | 31.0 |
| | 26.9 |
| | 5.1 |
| 26.3 |
| | 21.0 |
| | 61.0 |
|
Other operating income | (41.4 | ) | | — |
| | — |
| | — |
| |
Other operating expense (income) | | 4.2 |
| | 5.2 |
| | (41.4 | ) |
Total operating expenses | 1,381.3 |
| | 4,051.5 |
| | 1,011.3 |
| | 971.7 |
| 1,568.5 |
| | 1,595.0 |
| | 1,381.3 |
|
| | | | | | | | | | | | |
Operating income (loss) | 598.2 |
| | (1,999.7 | ) | | 67.6 |
| | 672.5 |
| |
Operating income | | 204.8 |
| | 236.5 |
| | 598.2 |
|
| | | | | | | | | | | | |
Change in financial assets | 24.9 |
| | 2,608.2 |
| | (57.3 | ) | | (78.5 | ) | (22.1 | ) | | (188.7 | ) | | 24.9 |
|
Interest expense, net | 168.1 |
| | 216.6 |
| | 89.9 |
| | 146.0 |
| 121.7 |
| | 128.0 |
| | 168.1 |
|
Other expense (Income), net | (10.1 | ) | | 22.7 |
| | 25.2 |
| | 334.2 |
| |
Other (income) expense, net | | (66.0 | ) | | 6.1 |
| | (10.1 | ) |
Loss on extinguishment of debt | 135.2 |
| | 1.1 |
| | 0.9 |
| | 10.5 |
| 0.2 |
| | 0.5 |
| | 135.2 |
|
Income (loss) before income taxes | 280.1 |
| | (4,848.3 | ) | | 8.9 |
| | 260.3 |
| |
Income tax expense (benefit) | 160.5 |
| | (835.5 | ) | | (33.6 | ) | | 124.2 |
| |
Net income (loss) | $ | 119.6 |
| | $ | (4,012.8 | ) | | $ | 42.5 |
| | $ | 136.1 |
| |
Income before income taxes | | 171.0 |
| | 290.6 |
| | 280.1 |
|
Income tax expense | | 24.9 |
| | 159.6 |
| | 160.5 |
|
Net income | | $ | 146.1 |
| | $ | 131.0 |
| | $ | 119.6 |
|
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Earnings (loss) per share | | | | | | | | |
Earnings per share | | | | | | |
Basic | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 0.97 |
| $ | 1.07 |
| | $ | 0.95 |
| | $ | 0.84 |
|
Diluted | $ | 0.84 |
| | $ | (28.01 | ) | | $ | 0.29 |
| | $ | 0.97 |
| $ | 1.07 |
| | $ | 0.95 |
| | $ | 0.84 |
|
| | | | | | | | | | | | |
Weighted-average shares outstanding | | | | | | | | | | | | |
Basic | 142.3 |
| | 143.3 |
| | 145.6 |
| | 139.3 |
| 136.0 |
| | 137.8 |
| | 142.3 |
|
Diluted | 142.6 |
| | 143.3 |
| | 146.1 |
| | 139.8 |
| 136.5 |
| | 138.3 |
| | 142.6 |
|
| | | | | | | | |
Dividends declared per share | $ | 0.64 |
| | $ | 0.58 |
| | $ | 0.25 |
| | $ | 0.46 |
| |
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.